MNI FED WATCH: Powell Leaves Door Ajar To September Cut

Federal Reserve Chair Jerome Powell signaled Wednesday the door to a rate cut at the September FOMC meeting is open, but the Fed leader did not commit to a move, instead emphasizing that the central bank should know a lot more about how the economy is responding to the Trump administration's policies by its next meeting. 

Powell said "the process will be slower" for the impact of tariffs to flow into inflation and it is "still quite early days" in that process. "A pretty reasonable base case is that this will be a one-time price increase, and in the end, we’ll make sure that that’s the case,” Powell said. “We’re just trying to do that efficiently, and efficiently means getting the timing right" for a cut. 

“If we cut rates too soon, maybe we didn’t finish the job with inflation. History is dotted with examples of that,” Powell said. “If you cut too late, then maybe you’re doing unnecessary damage to the labor market.”

“We have made no decisions about September. We don’t do that in advance,” he said. Markets responded by selling off as traders dialed back the odds of a rate cut in September to less than 50%. 

Powell and his colleagues are studying how tariffs filter through inflation data amid anxiety that higher goods prices will keep inflation above the Fed’s 2% goal for a fifth year. Services inflation has continued to ease, while increased tariffs are pushing up prices in some categories of goods, he noted. (See: MNI INTERVIEW2: Tariffs Inflation Impact Slow To Come -Mester)

DOWNSIDE RISKS

Meanwhile, "you do not see weakening in the labor market" but "downside risks to the labor market are certainly apparent," the Fed chair told reporters. 

"You do see a slowing in job creation but also a slowing in the supply of workers. So you have got a labor market that's in balance, albeit partially because both demand and supply for workers is coming down at the same pace and that's why the unemployment rate has remained roughly stable, which is why I said we do see downside risk in the labor market." 

The FOMC left the federal funds rate unchanged at its July meeting, the fifth straight meeting rates were held steady. The post-meeting statement included minimal changes and maintained optionality around adjusting the policy rate. 

Governors Miki Bowman and Christopher Waller and Bowman dissented in favor of a 25 bps cut. It was the first time in over three decades two Fed governors voted against consensus. 

Fed officials have varying opinions about how restrictive the current setting of monetary policy is at the moment, said Powell, adding he personally thinks conditions are modestly restrictive. "Policy should be a little bit restrictive, somewhat restrictive because we want inflation to move all the way back to its target," he said. 

"You could argue we are a bit looking through goods inflation by not raising rates. We haven't reacted to new inflation," he added. 

The Fed will have two sets of inflation and jobs reports to dissect before its next rate decision in mid-September. (See: MNI INTERVIEW: Fed Cuts Likely Delayed, Sept In Doubt-Lockhart)

"We believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments," said Powell.