(Reuters) – Inflation “remains above” the U.S. Federal Reserve’s 2% target, but has been improving in recent months and “more good data would strengthen” the case for central bank interest rate cuts, Fed Chair Jerome Powell said on Tuesday in congressional testimony.
In comments that appeared to show increasing faith that inflation will return to the Fed’s target, a requirement for easing monetary policy, Powell compared the lack of progress on that front in the first months of the year to recent improvement that has helped build the Fed’s confidence that price pressures will continue to diminish.
As well, the chair noted, the Fed is now also concerned about risks to the job market and economy should rates remain too high for too long.
STOCKS: The S&P 500 was up 0.3%, little changed after Powell’s commentsBONDS: The yield on benchmark U.S. 10-year notes edged higher and was was up around 3 basis points at 4.302%The 2-year note yield was up 2 basis points to 4.639%.
FOREX: The dollar index rose and was recently up 0.1% at 105.08
COMMENTS:
JAY WOODS, CHIEF GLOBAL STRATEGIST, FREEDOM CAPITAL MARKETS, NEW YORK
“In typical Jerome Powell fashion, he’s not really saying anything new and giving us the same soundbites. He is sticking to his course of being data dependent, adding the data is starting to trend our way but they are still waiting for more. He is not using this to set the stage for a rate cut. To me, he missed an opportunity here to solidify a rate cut in September.
“The Russell 2000 will be reacting the most, as it’s so rate sensitive. Powell didn’t give us a definitive path to a cut and so that sold off a bit.”
CHRISTOPHER HODGE, CHIEF ECONOMIST FOR THE US AT NATIXIS IN NEW YORK
“There isn’t much in the way of the main message that is new, but his emphasis has shifted a bit towards a balance of risks within the Fed’s mandate.”
“Powell has been optimistic about the prospects for inflation and is increasingly more cautious about the labor market – he says the labor market appears to be fully back in balance. Despite strong headline NFP numbers, the breadth of growth has narrowed, and measures of labor market slack (including the JOLTS series) has decreased. No one is sounding the alarm bells on the labor market just yet, but as the disinflationary process continues, the Fed must stay attuned to employment.”
“Increases in initial claims can be parabolic and the possibility of a soft landing is still very much in play, but the Fed needs to get ahead of weakness in the labor market.”
“This of course does not mean a cut is imminent, but it appears as if the foundations are starting to be laid for a pivot in September. This week’s hearing, the July FOMC, and Jackson Hole in August will allow Powell to fully flesh out the rationale for a cut in September.”
LAWRENCE GILLUM, CHIEF FIXED INCOME STRATEGIST FOR LPL FINANCIAL, FORT MILL, SOUTH CAROLINA
“With all the Fed communication out there we didn’t expect much out of this testimony.”
“The movements in the 10 year Treasury yield have really been determined by expectations of the neutral rate and an expectation of a pretty shallow rate cutting cycle, so we think that we will be at these levels for a while.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“Obviously (Powell is) keeping the debate of rate cuts this year that very much alive and that will be accepted by the market. There are no changes here. The Fed is getting closer to a rate cut.”
“I believe we’ll see a rate cut in September and another one in December.”
“Regarding the other side of the Fed’s mandate, just because you have 4.1% unemployment now doesn’t mean you can’t see 5% by September or October. We’re seeing a few big companies that are cutting back on employment.”
“But I don’t think the labor market’s going to become a problem. It’s about inflation coming down and we should get more evidence of that in this week’s data.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, BROOKFIELD, WI
“He’s beginning to tee up a rate cut. The question is exactly when. That’s something he’s not going to be able to answer. He says we need more data but we don’t know how much more. We already know governor Waller is looking for four months in a row of good inflation numbers. We already have one so maybe we need three more or maybe Powell is in the camp that we only need three months in a row of decent inflation numbers.”
“It does affirm the Fed is ready to cut and that 2024 is the year they’re going to start cutting. They’re not going to wait until 2025.”
“They view risks in not cutting soon enough. It used to be that they were singularly focus on inflation. That was the story for 2023. Now in 2024 they’re recognizing that there are risks if they don’t cut.”
“(Investors) shouldn’t expect him to make any radical changes to his stance on policy. Maybe this is just noise and a slight disappointment for people who were hoping he’d give greater clarity as to how much more data would give them confidence to cut.”
STEPHEN BROWN, DEPUTY CHIEF NORTH AMERICA ECONOMIST, CAPITAL ECONOMICS (from emailed report)
Fed Chair Jerome Powell’s opening statement for his congressional testimony today offers few clues about the potential timing of interest rate cuts, with the key line that the Fed is still looking for “more good data” to strengthen its confidence that inflation will return to target. That said, the neutral tone of the opening statement seems at odds with the softer tone of the recent activity data, so our sense is that a September interest rate cut remains very much in play.
MARC CHANDLER, CHIEF MARKET STRATEGIST, BANNOCKBURN GLOBAL FOREX, NEW YORK
“I think that Powell hit the right tone today, in so far as the markets haven’t really responded, which I think is the goal.”
“I don’t think he said anything that we didn’t know already, or that he didn’t say in Portugal. I’d say the highlight would be that he says the labor market has cooled, so that’s a little recognition of last Friday’s jobs data.”
MICHAEL ASHLEY SCHULMAN, CHIEF INVESTMENT OFFICER, RUNNING POINT CAPITAL ADVISORS, LOS ANGELES
“I heard three things so far: strong, weakening and normalizing – all economic terms relatively positive for an eventual cut by the Fed, but the Fed still remains data dependent.”
(Compiled by the Global Finance & Markets Breaking News team)
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