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Powell indicates a cut in rates may come sooner than expected

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2024-07-16

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Fed chair, Jay Powell has raised the temperature on the rate cut timing, suggesting Monday that a reduction might be closer than previously thought.

He said that a central bank won’t wait until inflation is at 2% (the Fed target) but showing sufficient weakness to convince policymakers that its on its way down. Speaking at the Economic Club of Washington DC on Monday, Powell said central bank policy works with “long and variable lags” to explain why the Fed wouldn’t wait for 2% target to be hit.

“The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%,” Powell said.

That’s a message for other central banks, especially the Reserve Bank here which has been giving off the vibe that it won’t cut until it believes inflation will hit and stay within its 2% to 3% range. Powell’s comments indicate the Fed (like the European Central Bank, Bank of Canada and central bank of Sweden) will cut rates once it is happy inflation is dropping.

That elevates the importance of the end of month PCE inflation data (Personal Consumption Expenditure rice Index, or PCE inflation). If the Fed’s favoured measure shows a cooling in core inflation, then the central bank’s stance will be bolstered.

Instead, the Fed is looking for “greater confidence” that inflation will return to the 2% level, Powell said on Monday “What increases that confidence in that is more good inflation data, and lately here we have been getting some of that,” he said.

Powell also said he thinks a “hard landing” for the American economy was not “a likely scenario.” Monday was Powell’s first public speaking appearance since last week’s consumer price index report for June showed inflation easing with prices actually falling month over month.

As of Monday, US markets think there’s a 90% plus chance of a rate cut in September.

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