Fed Chair's Guarded Optimism
Fed Chair Powell delivered a measured assessment of the US economy during his semi-annual Congressional hearings. Striking a balanced tone Powell acknowledged the progress made in taming inflation whilst emphasising caution regarding future interest rate cuts.
Powell noted that inflation, which peaked at a four-decade high two years ago, has significantly moderated to around 2.5%. However, he stressed that the Fed requires more evidence of sustained progress towards its 2% target before reducing interest rates. "We do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%," Powell stated in his prepared testimony.
Addressing the labour market, Powell characterised it as "strong, but not overheated", resembling pre-pandemic conditions. He highlighted the Fed's awareness of "two-sided risks" in their decision-making: cutting rates too soon could reignite inflation, while delaying cuts might unduly weaken the economy and labour market.
Treasury Secretary Janet Yellen echoed Powell's sentiments, stating that the labour market is no longer driving inflation to the extent it did earlier in the pandemic recovery.
Powell's testimony touched on consumer spending, noting signs of moderation after years of elevated inflation and rising interest rates. He emphasised the central bank's dual mandate of price stability and maximum employment, expressing readiness to respond should labour market conditions unexpectedly deteriorate.
While Powell's remarks didn't provide explicit signals about rate cuts, some analysts interpreted his comments on evolving risks as potentially laying groundwork for a September rate reduction, contingent upon supportive economic data.
Financial markets continue to price in approximately 50bps of rate cuts this year, with increasing probability assigned to a September move. However, upcoming economic indicators, particularly inflation data, will play a crucial role in shaping the Fed's decision-making process. Later today we have the CPI prints for June, which can shed more colour on the inflation picture. According to current estimates, the headline rose 0.1%mom last month, easing to 3.1%yoy, while the core readings may have risen 0.2%mom, remaining stagnant at 3.4%yoy.
Overall, Powell's testimony reflected a cautious approach, balancing optimism about progress against inflation with a commitment to data-dependent decision-making. His measured tone suggests the Fed is carefully weighing various economic factors as it considers future monetary policy decisions, potentially paving the way for interest rate cuts later in the year if economic conditions warrant.
Finally, for those of you who have lost sleep wondering if hippos can fly, science has your answer! According to research conducted by the Royal Veterinary College (RVC) nature’s aquatic tanks can achieve liftoff for a whopping 0.3 seconds. This followed observation of two hippos at Flamingo Land in North Yorkshire, opening up the world of ‘hippo locomotion’. Normally sticking to water, and a danger to humans, such findings may well lead to changes in enclosure design!
If you would like to receive The Daily Update to your inbox, please email markets@epicip.com or click the link below.