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Federal Reserve officials have given their strongest signal yet that they are preparing to cut interest rates, raising the prospect of relief for long-suffering U.S. borrowers for the first time since the coronavirus pandemic caused inflation to explode in the world’s largest economy.
In multiple public comments this week, including at Chairman Jay Powell’s congressional hearing, central bank officials spoke with renewed confidence about having inflation under control and being ready to embark on a policy shift.
Strengthening their confidence was better-than-expected economic data this week that confirmed the recession continues. Consumer price pressuresIt comes as the labor market weakens and U.S. banks warn that a long period of high prices is causing lower-income customers to show signs of financial stress.
Policy makers didn’t offer specifics about when or how much they would cut borrowing costs, but their comments made it clear a new era was underway. Traders and economists widely expect the first rate cuts to come in September, and Pimco economist Tiffany Wilding said after this week’s data that was a “decisive call.”
Chicago Fed President Austan Goolsby told the Financial Times on Friday that it had been a “good week” for the central bank, which has been trying to bring down inflation without triggering a U.S. recession.
“I definitely feel better. [now than on Monday]”Data from the past few months, although not just this week, suggest that the rapid and significant decline in inflation that we’ve seen in 2023 will continue,” Goolsby said.
Goolsby said the decline in inflation was real Interest level Now it is automatically more restrictive. “We have tightened it up considerably while we have been waiting. We should maintain this restrictive posture for as long as necessary. When that is no longer necessary, I think it would be appropriate to return to a more normal posture.”
Since last July, Federal Reserve The central bank kept its policy interest rate unchanged at 5.25-5.5%, the highest level in 23 years.
Powell told lawmakers earlier this week that the Fed does not need to focus primarily on inflation because “substantial progress” has been made in containing price pressures and the labor market is showing clear signs of cooling.
Instead, central banks should have been more aware that they faced a “two-sided risk” and that by continuing to batter the world’s largest economy with high interest rates, they were unintentionally causing excessive job losses.
His comments were backed up by those of San Francisco Fed President Mary Daly, a voting member until 2024, who told reporters later in the week that a rate cut would be “justified.”
The rationale for cutting rates as inflation becomes more firmly contained is the labor market, which Mr. Powell said this week is strong but not “overheating.”
With unemployment rising above 4% and wage growth slowing, not only is the labor market no longer driving price pressures, but without careful policy adjustments, any gains made since the pandemic could be at risk.
Avoiding that outcome is “the No. 1 thing that keeps me up at night,” Powell told members of the House Financial Services Committee.
“I would say it’s a pretty big communication signal that many of us and Chairman Powell are talking about how important the labor market is,” Daly told reporters.
Federal Reserve Governor Lisa Cook also emphasized this point in a speech this week, saying the Fed is “paying very close attention” to changes in the unemployment rate and will “respond.”
The Fed is aiming to achieve a “soft landing” in which inflation falls to its target without a surge in layoffs.
Priya Misra of JPMorgan Asset Management said the results assume the Fed will start easing soon and cut interest rates closer to 3 percent over time.
“The economy is certainly slowing and that appears to be slowing the labor market as well,” added Jonathan Pingle, a former Fed official and now chief economist at UBS.
“At some point, they will want to stop the slowdown and stabilize, but the risk is [that] It will continue.”
