The Fed's decisions themselves are not limited to the US. Their impact extends to international financial markets, influencing events in the investment environment. As a major player in the world economy, the country has a key role in determining global liquidity and stabilising prices. Therefore, every interest rate decision they make is closely watched not only by trading partners but also by the general public.

The path to price stability is real

In the context of the upcoming US presidential election to be held on 5 November 2024, the Fed chairman did not evade questions from both camps during his testimony before the Banking Committee. Democrats asked him about the risks to the labour market posed by a late rate cut, and Republicans were interested in the impact of inflation on households. Powell, however, suggested that achieving price stability while keeping unemployment low is possible. He also stated that the US economy had cooled, with the labour market stabilising to pre-pandemic levels. This situation supports the case for a possible adjustment of interest rates, which have been kept at 5.25% to 5.5% since July 2023.

Raised warning finger over correct timing

Encouraging statements were also supported by recent data on the number of new jobs, which showed a slowing trend month-on-month, but with a rising unemployment rate. This was compounded by the Fed report released ahead of Powell's speech, which reported a decline in price pressures, particularly in the key real estate sector. Another important factor is the decline in the June Consumer Price Index (CPI), which fell 0.1% month-on-month, better than the expected 0.1% increase. The US central bank has long been referring to the 2% inflation target as an important indicator that influences interest rate decisions. Although the first quarter inflation data did not show progress in this direction, the latest data already suggest an improvement. However, Jerome Powell has warned that too early or too late a rate cut, or insufficient adjustment could have a negative impact on the economy and the labour market. According to him, it is not necessary for inflation to fall below 2% to take the necessary measures.

CPI data for the last 5 years. Source: Investing.com

What are the current market forecasts?

According to the CME FedWatch tool, the market forecast as of July 12, 2024, is as follows: there is only a 6.7% chance that interest rates will be cut at the next Federal Reserve meeting on July 31, 2024, but as much as an 86.4% chance of a rate cut at the next meeting on September 18. In addition, 43.9% of respondents expect a second rate cut to take place in December, and nearly the same percentage of respondents, 43.8%, believe there may be as many as three rate cuts this year.

Source: CMEgroup.com

Conclusion

During his testimony before Congress, Jerome Powell gave a detailed overview of financial policy and macroeconomic conditions in order to provide a better understanding of the current economic situation and the decisions of the Federal Reserve Bank of the United States. The Bank is facing a crucial task of getting the timing of interest rate adjustments right. A too early cut could reignite inflationary pressures, while a too late could negatively affect the labour market. The Fed Chairman emphasised the importance of a balanced approach and the need for flexibility in the formulation of monetary policy in response to dynamic economic conditions.

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Sources:

https://www.reuters.com/markets/us/feds-powell-before-congress-could-show-developing-case-rate-cut-2024-07-09/

https://www.barrons.com/livecoverage/fed-jerome-powell-speech-congress-testimony-today

https://www.investing.com/news/stock-market-news/stock-market-today-nasdaq-tumbles-despite-soft-cpi-data-nvidia-falls-56-3514786

https://www.investing.com/news/economy-news/powell-testimony-what-to-watch-ahead-of-day-2-3513719

https://www.investing.com/economic-calendar/cpi-733?utm_source=google&utm_medium=cpc&utm_campaign=18448348983&utm_content=624652192076&utm_term=dsa-1546555491774_&GL_Ad_ID=624652192076&GL_Campaign_ID=18448348983&ISP=1&ppu=9801673&gad_source=1&gclid=Cj0KCQjwhb60BhClARIsABGGtw_jDxiNmeiF68VtT8-u029mqIae0j8aAicsRIuWKydZvI47czf8t_gaAr-zEALw_wcB

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html