Powell Hints at Possible Fed Rate Cuts Amid Inflation Progress

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In his congressional testimony on Tuesday, Federal Reserve Chair Jerome Powell expressed cautious optimism about recent trends in U.S. inflation, suggesting that continued positive data could pave the way for potential rate cuts. “More good data would strengthen” the case for easing monetary policy, Powell stated.

Over the past year, the Federal Open Market Committee (FOMC) has aggressively raised its benchmark lending rate by 525 basis points to combat inflation, starting from March 2022 through July 2023. However, the committee has maintained interest rates since then, with the most recent hold occurring last month. The FOMC’s Summary of Economic Projections, released on June 12, revised the forecast from three anticipated rate cuts in March to just one this year.

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Powell reiterated the committee’s stance on not reducing the federal funds rate until there is “greater confidence that inflation is moving sustainably toward 2%.” Although first-quarter data fell short of this confidence, recent readings have shown modest progress. For example, total personal consumption expenditure prices saw a 2.6% increase over the 12 months ending in May, with the core measure—excluding food and energy—mirroring this growth rate. These figures remain above the FOMC’s target.

Job market metrics also presented a mixed but hopeful picture. Payroll growth averaged 222,000 jobs per month in the first half of the year, and the unemployment rate was at a “low level of” 4.1% in June. Economic growth, as measured by gross domestic product (GDP), appears to have slowed in the first half of 2024 after showcasing “impressive” strength in the latter half of the previous year. Despite this moderation, Powell noted that “private domestic demand remains robust,” with consumer spending continuing to rise, albeit at a slower pace.

Powell warned against the premature relaxation of policy measures, stating, “Reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation. Conversely, delaying or limiting reductions too much could weaken economic activity and employment.”

Scheduled to testify before the House Financial Services Committee on Wednesday, Powell’s remarks come ahead of critical government data releases. Upcoming reports are expected to show a 0.1% monthly increase and a 3.1% annual rise in consumer inflation for last month, according to a Bloomberg consensus. Additionally, official producer price data for June are slated for release on Friday.

Market analysts widely anticipate that the Fed will hold interest rates steady at its next meeting on July 31. However, there is a 70% probability of a 25-basis-point cut in September, based on data from the CME FedWatch tool.