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Federal Reserve Chairman Jerome Powell has repeatedly said for months (which honestly feel like years) that more “data” is needed.
On Capitol Hill this week, he eyed a cooling labor market and agreed with the risks of waiting too long to cut interest rates. Wall Street took his comments as another optimistic sign that a rate cut was on the way. And now, with the encouraging inflation data on Thursday, clearly gleefully delivered at a birthday party, does the Fed finally have what it needs to act?
The markets are saying what Chairman Powell cannot say: yes.
Following this latest reassuring inflation reading, the market is now pricing in an 84% probability that the Fed will begin cutting rates at its September meeting, up from 73% the previous day, according to CME FedWatch.
“A September rate cut should be a lock at this point,” said Ron Temple, chief market strategist at Lazard. “Given the growing evidence of slowing economic growth, it’s time for the Fed to refocus on its dual mandate and ease monetary policy.”
Last week provided the latest evidence that the Fed should rethink its full-employment mandate: The June jobs report showed the unemployment rate rising for a second straight month to 4.1%, the highest since November 2021. While that figure is not historically high, it is getting there in this pandemic-era tightening cycle.
As worsening employment statistics continue to pile up, inflation statistics continue to trend favorably, and it appears that things are finally coming to a head.
Ultimately, as LPL Financial chief economist Jeffrey Roach noted, moderating inflation should allow the Fed to start cutting rates as labor market data becomes more volatile.
Of course, the Fed’s preferred inflation measure carries more weight. The next PCE reading is due to be released later this month, just days before the Fed’s July policy meeting.
Even encouraging data is unlikely to cause the Fed to suddenly change policy, but it will set the tone for the meeting and press conference, provide some final inflation insights before Powell restates his reasons for keeping rates steady — and perhaps, with a wink from the official, portend a key September period.
Powell’s critics have charged that his leadership relies too much on backward-looking data, but when the good news is overwhelmingly good and the bad news starts to get worse, patience may be running out.
Hamza Shaaban is a reporter covering markets and economics for Yahoo Finance. Follow Hamza on Twitter. translation:.
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