Powell Butters Us Up for a September Cut

Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

Federal Reserve Chairman Jerome Powell has laid the groundwork for a cut to interest rates in September.

Testifying before U.S. lawmakers, Powell indicated the Fed was now turning its focus to the labour market, where consideration must be given to how elevated interest rates can result in unnecessary job losses.

"In light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” said Powell in an opening statement to a two-day senate hearing.

"Reducing policy restraint too late or too little could unduly weaken economic activity and employment," said Powell.

The Fed has a dual mandate to maintain steady inflation and optimal employment. This means there could be a payoff regarding interest rates: if you only watch inflation, you might cut interest rates after meaningful damage has been done to the nation's workforce.

In short, the Fed is saying it thinks it can cut before inflation hits the 2.0% target. "He is fretting a bit more about the potential costs of waiting too long to ease," says Ian Shepherdson, Chairman and Chief Economist at Capital Economics.

But even on the question of inflation, Powell sounds optimistic. "After a lack of progress toward our 2% inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress."

"More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent," said Powell.

Markets see an odds-on chance of a rate cut in September and once more before year-end.

"Mr. Powell remains reluctant to signal the onset of monetary easing well in advance, scarred by the burst of inflation in Q1, but reading between the lines we think his base case is a September easing. The Jackson Hole symposium, held between August 22 and 24, provides an ideal opportunity for him to give customary notice of an impending policy change," says Shepherdson.

Shepherdson says we will receive one more employment report and two CPI reports before the symposium, "and we expect mostly soft numbers."