Powell Signals Possible Rate Cut in September... "Growing Confidence Inflation Will Slow to 2%"

Powell "Q2 Inflation Data Increases Confidence"
"Will Monitor Both Inflation and Labor Market"
Interest Rate Futures Market Sees 99.9% Chance of September Cut

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), stated that confidence is growing that inflation is falling to 2%. Powell expressed that the timing of interest rate cuts will be decided at each meeting, but investors are already taking a rate cut in September as a given.

On the 15th (local time), Powell said in a conversation with David Rubenstein, Chairman of the U.S. private equity firm Carlyle Group, at the Economic Club in Washington D.C. that regarding the slowdown in inflation, "We did not gain additional confidence in the first quarter, but three indicators in the second quarter (April to June) somewhat increased our confidence."

The U.S. Consumer Price Index (CPI) had been rising until March this year but has been continuously declining in the second quarter. The CPI inflation rate dropped from 3.5% in March to 3.4% in April, 3.3% in May, and down to 3% in June. Additionally, signs of cooling in the labor market are expected to continue the inflation slowdown trend.

Powell emphasized that the Fed's policy focus is now not only on easing inflation but also on managing the risks of labor market slowdown. After signaling this policy shift to the U.S. Congress last week, he sent the same message again on this day.

He said, "Inflation has now fallen, and the labor market has actually cooled," adding, "We will look at both, and these two are in a much better balance." He also explained that unexpected weakness in the labor market could be a reason for the Fed to respond.

The U.S. unemployment rate reached 4.1% in June, the highest level in two and a half years. The number of job openings per unemployed person was 1.22 as of May, the lowest since 2021. This is analyzed as the labor market cooling due to accumulated high-intensity tightening.

He reiterated that the Fed intends to start cutting interest rates before inflation falls exactly to 2%. Powell explained, "If we wait until inflation falls to 2%, it will be too long because the tightening level will continue to have an effect, and inflation will eventually fall below 2%."

Regarding the specific timing of rate cuts, he said it will be decided "at each meeting."

Currently, the U.S. benchmark interest rate is at 5.25?5.5% annually, the highest level since 2023. The Fed has raised rates 11 consecutive times since March 2022 and has maintained the current rate level for a year. The market expects the Fed to confirm inflation and employment indicators for two more months, build a foundation for rate cuts, and then start cutting rates at the Federal Open Market Committee (FOMC) meeting in September.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market reflects a 99.9% probability that the Fed will cut rates by at least 0.25 percentage points at the September FOMC. This probability rose from the mid-94% range earlier that morning.

After the June CPI data release, Mary Daly, President of the Federal Reserve Bank of San Francisco, stated that rate adjustments are necessary, and Austan Goolsbee, President of the Federal Reserve Bank of Chicago, also indicated the possibility of rate cuts, saying inflation is on a path toward 2%.