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Federal Reserve officials have sent their strongest signal yet that they are preparing to cut interest rates, raising the prospect of relief for struggling U.S. borrowers for the first time since inflation ripped through the world’s largest economy in the wake of the pandemic. of the coronavirus.
In public appearances this week — including a pair of congressional hearings for Chairman Jay Powell — US central bankers spoke with newfound confidence about their grip on inflation and a willingness to initiate a policy pivot.
The improvement in their confidence was better-than-expected economic data, which this week confirmed a continued easing of consumer price pressures. This has come along with a softening of the labor market. At the same time, US banks have warned that lower-income customers are showing signs of financial stress after a long period of high prices.
While policymakers stopped short of offering specifics on when and by how much they would cut borrowing costs, their rhetoric made it clear that a new era is upon us. Traders and economists generally expect the first cut in September – something Tiffany Wilding, an economist at Pimco, said was a “done deal” after this week’s data.
Chicago Fed President Austan Goolsbee told the Financial Times on Friday that it had been a “good week” for a central bank that has aimed to reduce inflation without triggering a US recession.
“I definitely feel better [now than on Monday]Goolsbee said. “It’s not just this week, but the data of the last two or three months points to a continuation of what happened in 2023, which was a rapid and very significant drop in inflation.”
Goolsbee added that falling inflation means that real interest rates are now automatically more restrictive. “We’ve been squeezed in real terms a lot while we’ve been sitting and waiting. You want to be this restrictive for as long as it takes. If you don’t need to, in my opinion, then it’s appropriate to go back to a more normalized attitude.”
Since last July, the Fed has kept its key policy rate at a 23-year high of 5.25-5.5 percent.
Powell made the case to lawmakers earlier in the week, telling them the Fed should not focus primarily on inflation with “substantial progress” in easing price pressures and the labor market showing clear signs of cooling.
Instead, the central bank faced “two-sided risks” and needed to be more aware of inadvertently causing excessive job losses by continuing to saddle the world’s largest economy with high interest rates.
His comments were backed by Mary Daly, president of the San Francisco Fed and a voting member for the duration of 2024, who told reporters later in the week that a rate cut would be ” guaranteed”.
Underlying the case for cuts, with inflation now more under control, is the labor market, which Powell said this week was strong but not “overheated.”
With the unemployment rate rising above 4 percent and wage growth slowing, not only was the labor market no longer adding to price pressures, but without careful policy calibration, the gains accumulated in the wake of the pandemic could be at risk. also.
Avoiding that outcome was “the number one thing that keeps me up at night,” Powell told members of the House financial services committee.
“I would say it’s a pretty big communication signal that you hear so many of us right now and lead Powell, more importantly, talking about how important the labor market is,” Daly told reporters.
That emphasis was echoed by Lisa Cook, a Fed governor, in a speech this week, saying the Fed was “very attentive” to changes in the unemployment rate and would be “responsive.”
The Fed is trying to achieve a “soft taper” in which inflation falls back to target without a sharp increase in layoffs.
That result is expected to prompt the Fed to start easing soon and eventually cut the policy rate closer to 3 percent, said Priya Misra of JPMorgan Asset Management.
“The economy is really slowing and it really looks like the job market is slowing because of that,” added Jonathan Pingle, who used to work at the Fed and is now chief economist at UBS.
“At some point, they will want the slowdown to stop and hold, but the risk is there [that] keep going.”