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Inflation in the United States (US) remains above the Federal Reserve’s (The Fed) 2% target, but recent improvements have bolstered confidence in a potential rate cut. In his testimony to Congress on Tuesday (9/7), Federal Reserve Chairman Jerome Powell indicated that better data supports the case for easing monetary policy.
Powell expressed increased confidence that inflation will return to the Fed’s target, a key requirement for considering a rate cut. He noted the lack of progress in the early months of the year but acknowledged recent improvements that suggest price pressures are easing.
In his remarks to the Senate Banking Committee, Powell emphasized that while the Fed remains concerned about inflation, it is also wary of the risks to the labor market and the economy if interest rates remain too high for too long. He highlighted that recent monthly readings show some progress toward the 2% inflation target, which strengthens the Fed’s belief that inflation is moving sustainably towards this goal.
Meanwhile, last Friday’s US labor report showed the addition of 206,000 jobs in June, indicating a solid job market but with a slowing monthly trend and a rising unemployment rate now at 4.1%. Powell described this rate as “still low,” but cautioned that maintaining overly tight policy for too long could unduly weaken economic activity and employment, potentially harming a period of solid US economic growth supported by strong private demand.
Powell’s comments may bolster expectations for a policy shift following the Fed’s meeting on July 30-31, potentially paving the way for a rate cut in September. Investor probability for a rate cut stands at 70%, barring any unexpected inflation surges.
At the Fed’s June 11-12 meeting, the median projection from 19 officials was for a quarter-point rate cut by year-end. However, since then, inflation data has been weaker than anticipated. The US consumer price index did not rise in May, and analysts expect further weakening when new data is released on Thursday.
Key Points:
- Inflation: Recent improvements have strengthened the case for rate cuts, despite inflation still being above the 2% target.
- Labor Market: Solid job growth with a rising unemployment rate highlights mixed economic signals.
- Policy Outlook: Powell’s testimony suggests a potential shift towards rate cuts, with investor probability for a September cut at 70%.
- Upcoming Data: Analysts anticipate further weakening in inflation data, which could influence future Fed decisions.
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