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Federal Reserve officials have sent even stronger signals that they are preparing to cut interest rates, raising the prospect of relief for long-suffering U.S. borrowers for the first time since inflation erupted across the world’s largest economy after the coronavirus pandemic.
In public appearances this week — including a pair of congressional hearings for Chairman Jay Powell — U.S. central bankers spoke with renewed assurance about their grip on inflation and their willingness to step down from the policy center.
Fueling their optimism was better-than-expected economic data, which confirmed continued easing in consumer price pressures this week. This has come with a softening of the labor market. At the same time, US banks have warned that low-income customers are showing signs of financial stress after a long period of rising prices.
Although policymakers stopped short of providing details on when and by how much they would cut borrowing costs, their rhetoric made it clear that a new era was underway. Traders and economists widely expect the first cut in September — a „done deal” that Tiffany Wilding, an economist at Pimco, said following this week’s data.
Chicago Fed President Austin Goolsbee told the Financial Times on Friday that it was a „good week” for a central bank that aims to reduce inflation without triggering a U.S. recession.
“I definitely feel better [now than on Monday],” Goolsbee said. „It’s not just this week, but the data over the last two to three months points to a continuation of what happened in 2023, which is a rapid and very significant drop in inflation.”
Goolsbee added that the fall in inflation means that real interest rates are now self-regulating. „We’re very tight when we sit and wait. You only have to be in this restraint as long as you are. If you don’t have to, in my view, it’s appropriate to return to a more natural posture.
Since last July, the central bank has kept its benchmark policy rate at a 23-year high of 5.25-5.5 percent.
Powell made the case to lawmakers earlier this week, saying the Fed doesn’t need to focus primarily on inflation. „Significant progress” has been made in containing price pressures and the labor market is showing clear signs of cooling.
Instead, the central bank faced „bilateral risks” and had to be acutely aware of inadvertently causing more job losses by continuing to wallow the world’s largest economy with higher interest rates.
His comments were echoed by Mary Daly, president of the San Francisco Fed and a 2024 voting member, who told reporters later in the week that a cut in interest rates „would be warranted.”
With inflation now more firmly under control, Powell said, underpinning the case for cuts, the labor market was strong but not „overheated” this week.
With the unemployment rate rising above 4 percent and wage gains slowing, not only is the jobs market no longer adding to price pressures, but without careful policy calibration, post-pandemic gains could suffer.
Avoiding that decision is „the first thing that keeps me up at night,” Powell told members of the House Financial Services Committee.
„I would say that what you’re hearing from a lot of us right now and having Powell at the helm is, essentially, talking about how important the labor market is,” Daley insisted to reporters.
Lisa Cook, the Fed’s governor, reiterated that assertion in a speech this week that the central bank is „very attentive” and will be „responsive” to changes in the unemployment rate.
The Fed is trying to achieve a „soft landing,” in which inflation falls back toward the target, without a sharp rise in job cuts.
Priya Mishra of JP Morgan Asset Management said the decision predicted the Fed would start easing soon and cut the policy rate to 3 percent over time.
„The economy is really slowing down and the labor market looks like it’s slowing down on the back end,” said Jonathan Bingle, who worked at the Fed and is now chief economist at UBS.
„Sometimes, they have to be stopped slowly and steadily, but the risk is there [that] It continues.”