MNI FED WATCH: Ready To Cut Rates As Soon As September

MNI (WASHINGTON) - The Federal Reserve could deliver its first post-pandemic U.S. interest-rate cut as soon as September if inflation continues to slow and the labor market stays the same, Federal Reserve Chair Jerome Powell said Wednesday after the central bank held rates at a 23-year high for an eighth straight meeting.  

"The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate, but that we're not quite at that point yet," he told reporters after a two-day Federal Open Market Committee meeting.  

The risk of dialing back restrictive monetary policy too soon could undermine the progress made on inflation so far, while waiting too long would put the recovery at risk, and Fed officials are keen to strike the right balance, he said.  

"If we were to see, for example, inflation moving down quickly or more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with its current condition, then I would think that a rate cut could be on the table at September meeting. 

"If inflation were to prove stickier and we were to see higher rise of inflation and disappointing readings, we would weigh that along with the other things."

INFLATION PROGRESS 

Futures markets have already full priced in a quarter-point rate cut in September with at least one more by the end of the year. 

The last couple of inflation readings have added to the Fed's confidence that price stability is in hand, Powell said. 

Headline and core PCE inflation has fallen to 2.5% and 2.6%, respectively, in June from their peaks at 7.1% and 5.6%. After an unexpected resurgence in the first few months of the year, prices in all three categories of core PCE inflation -- goods, housing, and non-housing services -- are slowing, Powell said. 

That's better progress than last year, when slowing goods inflation at an unsustainable rate was driving overall disinflation, he said. 

"It is just the question of seeing more good data," Powell said. "We did gain confidence. More good data would cause us to gain more confidence." (See: MNI INTERVIEW: September Fed Cut 'Not Assured' - Lockhart)

JOB MARKET NORMALIZING

Powell largely dismissed the idea that the U.S. labor market was on the cusp of a more rapid weakening, saying jobs and overall growth data bolster the view that the economy is returning to normal.  

Wage gains are slowing but still solid, layoffs are low and even if new unemployment benefits claims have moved up, they're stable and not historically high, he said. 

"What we think we're seeing is a normalizing labor market. We're watching carefully to see if it turn out to be more. If it starts to show signs it is more than that, we're well positioned to respond," Powell said. (See: MNI INTERVIEW: Worries Over US Jobs Weakenss Overdone- Bullard)

PATH AHEAD UNCERTAIN

No decision on the pace and timing of rate cuts has been made, Powell said, adding he could see "everything from zero cuts to several cuts" depending on the way the economy evolves. 

"I don't want to try to give specifics or forward guidance about when that might be, the pace at which it might happen," he said.  "That's really going to depend on the economy. That's highly uncertain." 

The U.S. presidential election in November will have no bearing on the way the Fed makes monetary policy, Powell said. 

"Anything that we do before, during, or after the election will be based on the data, the outlook, and the balance of risks and not on anything else."