The Fed is preparing the ground for the first rate cut. A choice that seems necessary if we are to prevent economic growth from being put at risk by too high interest rates for too long. This was emphasized yesterday by the chairman of the Federal Reserve System, Jerome Powell, during his regular six-monthly speech at the US Senate Banking Committee.
Affirming that the economy remains strong, as does the labor market, despite the recent freeze, Powell explained:
“In light of the progress made over the past two years in both reducing inflation and cooling the labor market, high prices are not the only risk we face,” he said, adding shortly after: “Reducing restrictive policies too late or too little could unduly dampen economic activity and employment.”
Ill Fed overnight rate it is currently between 5.25% and 5.50%, the highest level in 23 years, the result of 11 consecutive increases since inflation reached its highest level since the early 1980s.
Markets expect the Fed to begin cutting interest rates in September and likely follow with another quarter percentage point before the end of the year. FOMC members, however, indicated only one cut at their June meeting.
However, in recent days, Powell and his colleagues signaled that inflation data was somewhat encouraging after a surprise jump earlier in the year. Inflation, derived from the Fed’s preferred personal consumption expenditure price index, was 2.6% in May, after peaking above 7% in June 2022.
“After the lack of progress our 2% inflation target earlier this year, the most recent monthly readings indicated further modest progress,” Powell said. “More positive data will strengthen our confidence in this matter inflation moving steadily towards 2%”.
Democrat pressure
In the past, Powell has shied away from making politically charged statements and had to dodge political questions from committee members. This year, the issues could become contentious, as Washington experiences turmoil due to the volatility of the presidential campaign. Several Democratic members of the committee urged Powell to cut interest rates soon.
“I am concerned that if the Fed waits too long to cut interest rates, it could reverse the progress it has made in creating good-paying jobs,” committee chairman Sen. Sherrod Brown (D-Ohio) told Powell. “If unemployment is rising, you must act now to protect American jobs. Workers have too much to lose if the Fed overshoots its inflation target and triggers an entirely unnecessary recession.”
Powell finally emphasized that the Fed is not a political body and is not involved in assuming political positions outside of its roles. In his remarks, he emphasized the importance of the “necessary operational independence” for the Fed to do its job.
What do analysts say?
Commenting on Powell’s speech. David Pascucci – Market Analyst at XTBexplains that FED number one
“Constantly emphasizes that the goal Fed inflation to 2%, it then emphasizes the dual mandate, recalling the goal of full employment, a fundamental mandate given that the American economy is by definition “market-oriented,” that is, oriented toward the credit market. If there is no work, there is no future income to be allocated in the credit market, this is the main prerequisite for the existence of the double mandate, a mandate that they know very well in the Senate, as it is in the labor market itself. that slightly bigger questions came up, and which Powell was trying to get around in a less nimble way. Kennedy, for example, pointed out that the labor market is clearly suffering because, for example, 3/4 of the jobs created recently are government jobs, so actually jobs created by increased government spending that has already it is very high. Powell noted that unemployment is currently low, is at historic lows and therefore not a concern. At the same time, a little later he instead emphasizes that worsening unemployment will result Fed interfere“.
Pascucci continues, wondering.
“when will it intervene? Fedat what levels of unemployment?’ Just take the Sahm Rule for examplerule created by Claudia Sahm, an economist Federal Reserve which created its recession indicator using the unemployment rate. This rule predicts that a 0.5% deviation of the unemployment rate from its 12-month average low will trigger a recession, and now this figure is actually 0.43. we are one step away from Sahm’s rule recession. We know very well that central banks never predict, never prevent evil, but try to cure what is a huge problem. in a market-oriented economy, the negative effects are amplified with an almost exponential effect. Therefore, further deterioration of the unemployment rate is expected, as we have seen for several months now, to see what the government will decide. Fed Already on July 31, when other data related to unemployment benefit applications will be published, the latter have increased sharply since 2019.”
