Fed's Jerome Powell lays groundwork for cutting US interest rates

US central bank chairman's remarks at Economic Club firm expectations of initial rate cut in September

Federal Reserve chairman Jerome Powell at the discussion for the Economic Club at the Marriott Marquis in Washington. EPA

US Federal Reserve chairman Jerome Powell is setting the stage to cut interest rates this year.

During a discussion on Monday with fellow former Carlyle Group executive David Rubenstein at the Marriott Marquis in Washington, Mr Powell said recent economic data has added to the confidence for which the Fed has been searching.

“We've had three better readings, and if you average them, that's a pretty good pace,” he said during the event hosted by the Economic Club.

It was the fourth time Mr Powell spoke publicly since the Fed meeting last month. He used those opportunities to celebrate the recent disinflationary trend, including last week's Consumer Price Index (CPI) report.

The inflation report showed that prices decreased on a monthly basis for the first time in more than four years. It also marked the third consecutive month in which headline inflation declined on an annual basis.

“What we've said is that we didn't think it would be appropriate to begin to loosen policy until we had greater confidence that inflation was returning sustainably down to 2 per cent,” Mr Powell said.

“We've been waiting on that. And I would say that we didn't gain any additional confidence in the first quarter, but the three readings in the second quarter, including the one from last week, do add somewhat to confidence.”

His comments appear to have firmed investors' expectations of a looming rate cut.

The Federal Reserve has held its target range at 5.25 to 5.50 per cent since last July, with central banks in the UAE and Saudi Arabia also holding steady.

Now, investors are pricing in a 90 per cent chance that the Fed will make an initial quarter-rate cut in September, with two more quarter-rate cuts in November and December, according to CME Group data.

“If you look at what was holding them back from a rate cut, those obstacles are being removed,” Derek Tang, president and economist at the advisory firm LHMeyer, told The National.

“Things are falling into place really nicely for them.”

Federal Reserve chairman Jerome Powell speaks with David Rubenstein at the Economic Club event at the Marriott Marquis in Washington. AFP

Another major obstacle now being cleared is the labour market, which has added jobs at a blistering pace in the years after the pandemic.

But after a healthy 206,000 jobs added in June and the unemployment rate ticking up to 4.1 per cent, Mr Powell said the labour market has returned to pre-pandemic levels.

With signs that the labour market is cooling, he said the Fed's dual mandate – price stability and maximum employment – is better balanced.

“So we're back to that place, no longer overheated,” Mr Powell said.

That sentiment broadly echoed what he said in congressional testimony last week, when he described the labour market as “strong, but not overheated” and no longer a “source of broad inflationary pressures for the economy”.

“They're in much better balance and that means that if we were to see an unexpected weakening in the labour market, then that might also be a reason for reaction,” Mr Powell said, referring to the Fed's reaction function.

As these two risks come into greater balance, he is also warning about the sensitivity on timing rate cuts.

Moving too early or too late both carry serious consequences for the economy.

Cutting rates too soon could see some progress on inflation reversed, while holding on for too long can cause a sharp slowdown in the economy and a sudden sharp rise in unemployment.

Mr Powell said it would be a mistake to wait until 2 per cent inflation before cutting rates.

“The Fed can now afford to be a little bit more forward-looking and say it's not just about the day-to-day, but thinking about what could happen the next three to six months, and maybe try to prevent some of the bad outcomes from taking place,” Mr Tang said.

The Fed holds its next two-day meeting on July 30 and 31.