Powell flags Fed rate cut before inflation hits 2%
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The news: US Fed Chairman Jerome Powell said the central bank will not wait for inflation to hit its 2% target before cutting interest rates, as it would be too late by then.
The numbers: PCE inflation, the Fed's preferred measure, rose 2.6% in the year to May, down from 7.1% in June 2022. The next reading is due in two weeks, with economists expecting another measure due Thursday, CPI inflation, to print a slightly lower annual reading.
The context: On his second day addressing Congress, Powell told the House of Representatives the bank had “some confidence” inflation was moving sustainably towards its target but wanted “more good inflation readings” to be more confident.
Markets are pricing a roughly 70% chance the Fed will cut rates at its September meeting.
What they said: "You don't want to wait until inflation gets all the way down to 2% because inflation has a certain momentum. If you waited that long, you probably waited too long, because inflation will be moving downward and we'll go well below 2%, which we don't want,” Powell said.
“We also have an employment mandate, so I could also see us cutting… if we saw unexpected weakening in the labour market.” Although the labour market remains strong and the unemployment rate is near historic lows, it has risen to 4.1% in the past few months.
Powell also said he did not believe interest rates would go back to the “very low” levels that prevailed in the period between the global financial crisis aftermath and the 2020 pandemic.
The source: House Financial Services Committee broadcast
