Powell puts September on the table for rate cuts

Powell’s remarks at his news conference after the end of a two-day Fed meeting seemed like confirmation of a coming turn in September, which was partly reflected in the central bank’s new monetary policy statement.

“There has been some further progress toward the Committee’s 2% target,” the central bank’s Federal Open Market Committee said in a statement, in which it kept its benchmark overnight interest rate on hold. in the range of 5.25%-5.50% .

Powell went further, telling reporters that “there is a growing sense of confidence that action could be taken at the next meeting” provided that upcoming inflation data confirms its recent slowing trend.

The central bank uses the personal consumption expenditures price index for its 2% annual inflation target. The PCE price index rose 2.5% in June, after topping 7% in 2022, and recent monthly readings have shown it even closer to the target.

Investors saw Powell’s comments as clear preparation for a cut in borrowing costs at the Fed’s meeting on September 17-18, just seven weeks before the US election on November 5.

“Listening to him talk, it’s clear that everyone is ready for the September rate cut and that they will maintain their optionality,” said Mark Malek, chief investment officer at SiebertNXT.

Interest rate futures, stocks and Treasury bonds rose sharply after Powell’s comments, so much so that the probability of a first cut in September of half a percentage point rose to about 15%, according to CME Group’s FedWatch tool.

Powell, however, said a 50-basis-point cut was not something being actively considered.

Dual mandate

While Fed officials are wary of any action that might undermine their “data, not politics” approach to setting borrowing costs, the steady decline in inflation in recent months has created a broad consensus that the battle against rising prices is coming to an end.

Inflation, the Fed said, was now only “somewhat elevated,” a key downgrade from the assessment it has used throughout much of its battle against rising prices that it was “elevated.”

“We have not made any decisions on future meetings” regarding rate cuts and all decisions will be made on a meeting-by-meeting basis, Powell said at his news conference.

But he added that as Fed officials have gained confidence that price pressures are easing, “the economy is approaching the point where it will be appropriate to reduce our policy rate.”

The Fed’s statement also removed a reference to it being “closely vigilant about inflation risks,” replacing it with an acknowledgement that policymakers were now “mindful of risks to both parts of their dual mandate,” which includes Congress’s charge to maintain maximum employment consistent with stable prices.

U.S. central bankers have said it would be appropriate to cut borrowing costs before inflation actually returns to target, to take into account the time it takes for monetary policy to affect the economy.