Fed Beige Book Confirms Economic Slowdown Trend
Wall Street Expects Two Rate Cuts This Year Starting in September
Officials of the U.S. Federal Reserve (Fed) have consecutively made remarks suggesting that the timing for a benchmark interest rate cut is approaching. Following Fed Chair Jerome Powell, other Fed officials have hinted at a shift in monetary policy, leading Wall Street to anticipate that the Fed will begin a pivot at the September meeting and cut rates more than twice within the year. Additionally, the Fed's economic activity report has confirmed a slowdown trend, supporting expectations for a rate cut in September.
Christopher Waller, a Fed Governor, stated on the 17th (local time) at an event hosted by the Federal Reserve Bank of Kansas City that "While we have not yet reached the final destination, we are getting closer to the point where we need to cut the policy rate."
He described current inflation indicators as "very favorable" and said, "We can expect a rate cut in the near future." He added, "The current data aligns with achieving a soft landing," and explained, "We will look for data in the coming months that supports this view."
Waller also emphasized that the Fed is shifting the focus of its policy not only toward price stability but also toward achieving full employment. He said, "The risk of rising unemployment is greater than what we have observed for a long time," and added, "We will pay close attention to employment, which is also a central bank mission."
As Waller, who holds voting rights in the Federal Open Market Committee (FOMC) rate decisions, is classified as a 'moderate hawk' (favoring monetary tightening) within the Fed, his remarks are interpreted as signaling an imminent policy change. Earlier, Fed Chair Jerome Powell also expressed on the 15th increased confidence that inflation is declining toward 2% and indicated an intention to begin rate cuts before reaching the 2% target.
John Williams, President of the New York Fed and considered the Fed's de facto second-in-command, also hinted that the Fed may soon start cutting rates. Unlike other regional Fed presidents, the New York Fed president holds a permanent voting seat on the FOMC.
In an interview with The Wall Street Journal (WSJ) the previous day, Williams evaluated recent three-month inflation indicators as "getting closer to the disinflation trend we are looking for," calling it a "positive signal."
The U.S. Consumer Price Index (CPI) rose through March this year but has been 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 3.0% in June. Additionally, the overheated labor market is showing signs of cooling.
Williams said, "Various inflation measures are all moving in the right direction and are quite consistent," adding, "I want to see more data that gives us additional confidence that inflation can sustainably move toward the 2% target. We will actually learn a lot between July and September."
The Fed's economic activity report released that day, the 'Beige Book,' confirmed the slowdown trend. The report assessed that economic activity increased somewhat in 7 of the 12 districts, while in 5 districts, economic activity was flat or declining. In the May Beige Book, only 2 districts reported flat or declining activity, so this number has increased by 3.
The Fed specifically noted that slower growth is expected in the economic outlook. It stated, "Due to uncertainties surrounding elections, domestic policies, geopolitical conflicts, and inflation, slower growth is expected over the next six months." The May report described the outlook as "somewhat more pessimistic," but this report contains more detailed content. The Beige Book, which evaluates economic trends in the 12 Fed districts, serves as a basis for the FOMC regular meeting scheduled for the 30th-31st.
Wall Street expects the Fed to build the foundation for rate cuts by further monitoring inflation and employment indicators over the two months before the September FOMC meeting. The market has taken a September rate cut as a given and anticipates the Fed will cut rates more than twice within the year.
According to the Chicago Mercantile Exchange (CME) FedWatch tool on that day, the federal funds futures market reflects a 96.2% probability that the Fed will cut rates by at least 0.25 percentage points at the September FOMC. The probability of a 0.5 percentage point or greater cut in November is 59.4%, and the probability of a 0.5 percentage point or greater cut in December is 94.2%.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
