Investing.com — Federal Reserve Chairman Jerome Powell on Tuesday did not rule out expectations of a September interest rate cut, instead appearing to lay the groundwork for further cuts in the coming months, noting that the recent labor market weakness is an increasingly important factor in the wheel of the Fed’s interest rate decisions.
“Higher inflation is not the only risk we face,” Powell said in testimony before the Senate Banking Committee on Tuesday, noting that “the labor market has really cooled significantly by many measures.”
For a long time, containing high inflation was the key, and perhaps the only, risk to the Fed, and little attention was paid to the Fed’s other main policy focus: maximum employment. And for good reason: jobs remained plentiful.
But signs of a cooling in the labor market have forced the Fed to shift focus and acknowledge that the risks are two-sided, as keeping policy too high for too long could do serious damage to jobs and the economy.
After noting that labor market indicators have “returned to pre-pandemic levels,” Powell said, “Reducing policy restraints too late or by too little could weaken economic activity and employment too much.”
The Fed’s acknowledgment that risks are more two-sided suggests the central bank’s outlook on the balance of risks is changing, “reasonably supporting a rate cut in September,” Evercore ISI said on Tuesday.
While the Fed chairman appears to have set the stage for a rate cut in September, upcoming economic data remains influential, Evercore ISI added. Thursday’s inflation report “could underpin and support the Fed’s evolving assessment.”
Others agreed, pointing to the Fed’s annual Jackson Hole Symposium in August as a potential opportunity to shore up expectations of a September rate cut.
“If our forecast is correct and the data is released as we expect, we expect the Jackson Hole Symposium in late August will be used to provide the clearest signal to markets about impending policy easing,” ING said in a note on Tuesday.
