According to the "Fed Communication Agency," Powell's latest speech suggested that a rate cut is imminent. Although he refused to reveal a specific time, it cannot change the market's expectation of standing pat on the July meeting. Other comments suggest that the most likely start of the rate cut is in September. Powell is also focused on the softening of the employment market, saying that if there is unexpected weakness in the labor market, it may be another reason for policy response.
On Monday, July 15th, at around 12:35 p.m. Eastern Time, Federal Reserve Chairman Powell attended a lunch meeting at the Economic Club of Washington, D.C. and talked with the chairman of the club and co-founder of the Carlyle Group, David Rubenstein.
This is his first public speech since last week's CPI inflation cooled down more than expected. The Federal Reserve's FOMC monetary policy decision will be made on July 31st, with officials entering a blackout period between this Saturday and the Friday after the FOMC meeting. Therefore, Powell's and other voters' comments this week are crucial.
Nick Timiraos, a well-known financial journalist known as the 'Fed news agency,' said that Powell's latest speech hinted at a rate cut, but refused to reveal the specific timing. The Fed led by Powell usually avoids unexpected market moves on short-term policy decisions, so his remarks today did not change the market's expectation that the Fed will hold steady in July. Powell said:
"The slowdown in inflation and economic activity is basically in line with the Fed's expectations. I won't send any signals about any specific FOMC meeting. We will make corresponding monetary decisions at each meeting."
Overall, Powell's speech still sounded dovish, saying that the US economy has been good in recent years, and the job market has entered a better and more balanced state. He specifically mentioned that US inflation has made more progress in the second quarter of this year, and that the recent three inflation reports have been "quite good":
"The economic data for the first quarter did not increase our confidence (that inflation would fall to the 2% target), but the data for the second quarter, including last week's data, did enhance our confidence to some extent."
He pointed out that while the Fed is concerned about the cooling of inflation, it is also beginning to pay more attention to the potential risks of weakness in the labor market. Some analysts claim that recent comments by several Fed officials are strengthening this key shift in tone:
"Now that (US) inflation has fallen, and the labor market has actually cooled down, we will consider (maximizing) the dual mandate of employment and price stability, and between the two, the balance is much better. If there is unexpected weakness in the labor market, it may also be another reason for taking policy action (such as a rate cut)."
Powell also reiterated his remarks during congressional hearings last week, saying that it is not necessary to wait for inflation to fall to the Fed's 2% target before cutting interest rates, "that would be too long to wait," because the impact of monetary policy is lagging. If interest rates are maintained too high for too long, it will overly suppress economic development, and "the job market need not be tighter than before the COVID-19 pandemic."
Other comments he made during the Q&A session include:
When asked if he would serve as Fed Chairman until May 2026, Powell said, "Yes." As for whether he will continue to be appointed as Fed Chairman in the future, he has no comment today. He is "very happy" to serve as the Fed Chairman.
"Hard landing of the US economy" is currently not the most likely scenario, and there has always been a "soft landing" path. There is a possibility of "inflation falling to 2% without causing pain in the job market."
The neutral interest rate may have risen compared to the level during the crisis. The FOMC monetary policy still has some restrictive effects, but it is not highly restrictive. The factors that have caused slow changes in prices may have changed or may not have changed.
The Fed will use ChatGPT to predict the questions that the media may ask after the FOMC press conference, but it will not use AI for monetary policy decisions. The questions generated by ChatGPT are not as good as those asked by on-site journalists.
For a long time, I have been very worried about the unsustainability of the US budget deficit. Although the Fed should not evaluate these, we really need to work hard to resolve the unsustainability of the debt problem. Solving the deficit problem requires bipartisan cooperation.
"Political violence has no place in American society." Former US President Trump's injury was not more serious, which is worth celebrating. The Fed's decision will not be influenced by political factors, and Powell refused to comment on the market's reaction to Trump's injury.
During Powell's speech, US stock indices maintained an upward trend, with small cap stocks up nearly 2% and the Dow Jones Industrial Average up more than 200 points, both hitting historic highs in early trading with the S&P 500 index. After the Q&A session, the gains in the major stock indices except for small cap stocks narrowed.
As Powell discussed progress and confidence in inflation, the yield on 10-year US Treasuries briefly fell below 4.20% to refresh intraday lows. It recovered the short-term decline during the speech and expanded to 4.6 basis points after the speech, rising above 4.23%.
The yield on 2-year US Treasuries also briefly fell to a daily low of 4.4154% and rebounded to nearly 4.46% after Powell's speech.
Spot gold widened its gains to a daily high of $2,439.75 per ounce early in Powell's speech, but narrowed to a 0.4% gain of just under $2,420 after the speech. It had risen by 1% and above the $2,430 integer mark before Powell's speech.
The usd index DXY fell and pressured 104 on the first day of Powell's speech, but later recovered all losses and turned upward again. The USD/JPY rose 0.1% to return to above 158, after plunging to a daily low of 157.19 earlier.
Editor/Somer