Powell was tightlipped on timing, but subtle shift on policy tees up sooner cuts

Federal Reserve chairman Jerome Powell on Monday was tightlipped on when the Fed could start cutting interest rates, but the Fed chief’s increased focused on the labor market, suggest the U.S. central bank is getting more confident of dropping the axe on rates soon.

During an interview at the Economic Club of Washington, D.C., Powell said that while “it’s been appropriate to focus mainly on inflation” for a long time, the cooling in the labor market now also warrants the Fed to watch out for an unexpected weakening in the labor market that may also provide “a reason for reaction by us.”

Powell’s comments on “paying more attention to the labor side of the dual mandate suggest that the Fed is getting more confident about a rate cut at some point soon,” Jefferies said in a Monday note.

The fed chief tipped his hat to recent data showing progress on inflation seen in the second quarter following upside surprise in Q1. “The second quarter, actually, we did make some more progress. We’ve now had three better readings … and if you average them, that’s a pretty good pace,” Powell said.

Looking ahead, the data over next few weeks, however, could “muddy the water further,” Jefferies added.

Tuesday’s retail sales are expected to be weighed down the tech-related issues suffered by many large auto dealer networks, while upcoming jobs data and the July nonfarm payrolls report may reflect the impact of “massive power outages in the Greater Houston Area caused by Hurricane Beryl,” Jefferies said as it held onto its forecast for one rate cut this year.

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The July payrolls data, Jefferies says, may serve as catalyst for whether it brings forward its September rate cut forecast.

“Pending the upcoming employment data, we may move the cut forward to September from December, but we would not expect that the Fed will follow that rate cut with a series of subsequent cuts at each meeting thereafter,” Jefferies said.

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