While Fed Chair Jay Powell wouldn't get drawn into any discussions about the potential timing of any rate cut in the first of two appearances before the US Congress on Tuesday, he did send a hint or three to keep watching the central bank because something could be brewing.
Asked when the Fed would cut rates, Powell replied, "I'm not going to be sending any signals about the timing of any further actions." He then went on to make the clear point that "inflation has eased notably" in the past two years, though it still remains above the central bank’s 2% target.
Powell then pointedly noted that “elevated inflation is not the only risk we face.” Cutting interest rates “too late or too little could unduly weaken economic activity and employment,” he told the US Senate Banking Committee.
Powell told the Senate Committee that the inflation reports covering the first three months of this year did not boost Fed officials’ confidence that inflation was coming under control.
“The most recent inflation readings, though, have shown some modest further progress,” Powell told the Senate committee, “and more good data would strengthen our confidence that inflation is moving sustainably toward 2%.”
On Wednesday, he will appear before the House of Representatives Financial Services Committee, a day before the June Consumer Price Index data is released. It is forecast to ease slightly to around 3.1% with the core reading remaining unchanged at 3.4%.
If that happens, then Powell’s remarks will be taken as hinting at a rate cut later this year. If there is no change or a blip upwards, the headline might be 'rate cut off.'
If you had to pick a single factor why the Fed and Powell seem to be a bit more optimistic, it would be the June jobs report last Friday.
Powell told the Senate the job market has “cooled considerably.” He added that the economy’s growth has moderated after a strong expansion in the second half of last year.
The June jobs report showed that while job creation remained OK in June, the unemployment rate rose for a third straight month to 4.1% (it was 3.6% in June 2023). There were also substantial revisions to previous month's figures that made the increases less threatening.
The weak jobs report for June confirmed the cooling trend in employment has accelerated. While 206,000 new jobs were reported for last month, those revisions knocked 111,000 off the first estimates for April and May, including a big write-down in the April figure.
Those revisions and earlier cuts to first-time estimates saw the average monthly jobs figure cut to 177,000 over the June quarter, down sharply from the 269,000 rate in the three months to March.
The unemployment rate edged up to 4.1% from just under 4% in May. That was the highest in almost three years, and the big plus for the Fed and markets was a slowing in wage growth to an annual 3.9%.
The 3.9% rate was the equal slowest growth for almost three years, but it is still better than core US inflation, which is around 2.6% (for the core reading of the personal consumption expenditure price index, or PCE inflation).
That’s why Powell could tell the Senate Committee that the US labor market “is not a source of broad inflationary pressures for the economy.”
And if that remains the case for the next couple of months, then a rate cut will follow.
