CEO Morning Brief

Powell Says More Good Inflation Data Would Boost Fed Confidence

Publish date: Wed, 10 Jul 2024, 10:33 PM
TheEdge CEO Morning Brief

(July 9): US Federal Reserve (Fed) chair Jerome Powell said “more good data” would strengthen confidence that inflation is moving down toward the US central bank’s 2% target, and recent readings point to “modest further progress” on prices.

In testimony prepared for a Senate hearing on Tuesday, Powell warned that lowering interest rates too little or too late could put the economy and the labour market at risk.

“Elevated inflation is not the only risk we face,” he told lawmakers on the first of two days of congressional testimony. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

The Fed chair also said cutting rates too soon or too much could stall or reverse inflation progress.

“More good data would strengthen our confidence that inflation is moving sustainably toward 2%,” Powell told the Senate Committee on Banking, Housing, and Urban Affairs in prepared remarks. He testifies on Wednesday before the House Financial Services Committee.

US central bankers are aiming to bring inflation back to the 2% goal following a post-pandemic surge in prices. While the labour market has held up under pressure from higher interest rates, an uptick in the unemployment rate has added political pressure on Fed officials to start reducing borrowing costs.

Powell’s remarks suggest the Federal Open Market Committee is unlikely to reduce rates when it meets at the end of this month.

Treasury yields oscillated but were higher on the day and the S&P 500 index remained higher after Powell’s testimony was released.

Traders are pricing in a just over 70% probability that the Fed first cuts rates in September. They see two quarter-point rate reductions in 2024.

Fed officials have welcomed recent data indicating inflation is decelerating again following a jump in prices at the start of the year, though several other policymakers have also said they need more confidence that the trend will continue before reducing borrowing costs.

The Fed’s preferred inflation measure rose 2.6% in the 12 months through May, down from 7.1% in June 2022. While unemployment remains low at 4.1%, it has ticked up in each of the last three months.

A number of economists are warning that there’s a slowdown afoot in the job market that could worsen. The number of people who have been looking for a job for 15 weeks or more rose in June to the highest level since early 2022, when that measure was rapidly declining.

Powell called the labour market “strong, but not overheated,” adding that the central bank’s restrictive stance is working to bring supply and demand into better balance.

“Another increase in the jobless rate in the July report could challenge our base case of one rate cut this year in December, raising the possibility of two cuts starting in September,” said Yelena Shulyatyeva, senior economist at BNP Paribas.

The Fed has held its policy rate at what it describes as a restrictive level of 5.25% to 5.5% for a year. Futures traders have almost fully priced in a cut for the Sept 17-18 policy meeting, less than two months before the US election.

Source: TheEdge - 10 Jul 2024

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