Powell Signals Rate Cut Coming Into View Inflation and economic activity are cooling, in line with the Fed’s expectations.
Federal Reserve Chair Jerome Powell declined to change expectations Monday that the central bank would hold interest rates steady at its meeting in two weeks as officials look ahead toward potential rate cuts after that.
Powell said inflation and economic activity had slowed broadly in line with the central bank’s expectation. Data on price pressures between April and June “do add somewhat to confidence” that inflation will return to the Fed’s target after inflation readings failed to provide such confidence earlier this year, he said during a question-and-answer session in Washington on Monday.
But Powell declined to say whether that would justify lowering interest rates at policymakers’ meeting later this month, on July 30-31. Investors broadly expect the central bank to start reducing rates at its following gathering in September.
“I’m not going to be sending any signals one way or another on any particular meeting,” Powell said. “We’re going to make these decisions meeting by meeting.” (…)
In an interview Friday, Chicago Fed President Austan Goolsbee said he was concerned that holding rates steady would contribute to an unduly tight policy stance because with every new month in which inflation is lower, the inflation-adjusted benchmark rate is rising.
“We set this rate when inflation was over 4%, and inflation is now, let’s call it, 2.5%. That implies we have tightened a lot since we’ve been holding at this rate,” Goolsbee said. (…)
Odds of a July rate cut were low immediately before Powell spoke, at around 13%, according to interest-rate futures prices from CME Group, and they drifted down to around 7% after his remarks Monday afternoon. (…)
Bloomberg provides other interesting Powell quotes:
- “Now that inflation has come down and the labor market has indeed cooled off, we’re going to be looking at both mandates,” Powell said. “They’re in much better balance.”
- Powell described the labor market as “no longer overheated”.
- “It seems to me that the neutral rate is probably higher than it was during the inter-crisis period, and so rates will be higher,” said Powell, noting that current policy feels “restrictive” but not “severely restrictive.“
Why Wait? asks Goldman Sachs’ Jan Hatzius:
(…) Using the latest unemployment and inflation numbers, we estimate that the median of the Fed staff’s monetary policy rules now implies a funds rate of 4%, well below the actual rate of 5¼-5½%. Based on this observation, the encouraging June CPI, and Chair Powell’s congressional testimony last week, we expect adjustment cuts to start soon.
Markets are almost fully priced for a cut at the September 17-18 FOMC meeting, which remains our baseline forecast. But we see a solid rationale for cutting as early as the July 30-31 meeting.
First, if the case for a cut is clear, why wait another seven weeks before delivering it? Second, monthly inflation is volatile and there is always a risk of a temporary reacceleration, which could make a September cut awkward to explain. Starting in July would sidestep that risk. Third, the FOMC has an undeniable (if never acknowledged) incentive to avoid initiating cuts in the last two months of a presidential election campaign. This doesn’t mean the committee couldn’t cut in September, but it does mean that July would be preferable. (…)
In a Republican sweep, we expect a full extension of the 2017 tax cuts as well as increased tariffs that are recycled into fresh tax cuts. Our analysis presented at the ECB’s Sintra conference earlier this month suggests that a 10pp increase in the effective US tariff rate with full retaliation by US trading partners would subtract 0.5pp from GDP growth and add 1.1pp to core PCE inflation for a year. The combination of a modest growth hit and a significant inflation boost could slow down Fed cuts next year, with the important caveat that policy reactions to tariffs may be muted given that the inflation boost should drop out after a year (much like a VAT or sales tax hike) and that the case for significant cuts remains strong in a baseline without a trade war. (…)
According to ADG, Mr. Powell also said on Monday:
If you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%.
Canadian Firms Plan to Curtail Wage Increases, Hold ‘Glum’ Sales Outlook Downbeat results from Bank of Canada survey lifts likelihood of rate cut next week
Canadian business owners have a dour sales outlook and say they plan to sharply scale back pay increases over the next year, according to a quarterly survey issued Monday by the Bank of Canada.
The results from the business-outlook survey reflect subdued economic activity and a softening of upward price pressures, leading economists to predict a second straight quarter-point rate cut from the Bank of Canada next week—so long as inflation data for June, out on Tuesday, doesn’t surprise on the upside. (…)
The survey released Monday indicated that the share of firms citing labor shortages as a capacity constraint fell to the lowest level since 2009, as soft sales expectations have curtailed hiring and the labor force has expanded at a rapid pace because of immigration.
Close to 60% of firms said they expect growth in labor costs to be weaker over the next 12 months, versus 11% that said they would be higher. Businesses said they expect to deliver wage increases of 3.4% over the next year, down from the previous quarter’s expectation of 4.1% and the outlook in the year-ago quarter of 4.5%. Only 15% of companies reported labor shortages, or the lowest level since mid-2020. (…)
The survey also reported that firms expect slower growth in prices for their inputs, and the price they charge their customers. The survey said businesses attributed the downward pressure to slowing wage growth and weakness in demand.
The central bank’s survey suggested firms would report below-average sales growth over the next 12 months, with 37% of firms indicating that future-sales indicators—like order books and sales inquiries—have deteriorated compared with a year ago. Businesses reported that consumers are trading down to less-expensive products, or looking for discounts. The deterioration in the sales outlook was particularly acute for firms that provide discretionary, or nonessential, goods and services, the central bank said. (…)
Xi Jinping’s Great Economic Rewiring Is Cushioning China’s Slowdown Advances in electric vehicles, solar and semiconductors are helping the nation navigate its property slump
(…) Xi Jinping’s long quest for technology-driven “high-quality growth” is actually starting to pay off.
While Japan and America both suffered deep economic setbacks when their housing markets hit the skids, China’s tech advances and resulting export boom have helped to keep economic growth within reach of its targeted pace of around 5%. (…)
For Xi, those protectionist salvos only reinforce his resolve to build self sufficiency in strategic areas such as advanced computer chips to ensure China can’t be hobbled by any worsening in trade — or military— tensions.
If Beijing can keep batting away US-led containment efforts, exclusive analysis from Bloomberg Economics forecasts the hi-tech sector will account for 19% of gross domestic product by 2026, up from 11% in 2018. Combining what Beijing has dubbed the “new three” — EVs, batteries and solar panels — the proportion of GDP swells to 23% of GDP by 2026, more than enough to fill the void from the ailing real estate sector, which is set to shrink from 24% to 16%.
“Pessimism on China’s prospects is understandable but also overdone,” say Chang Shu and Eric Zhu, economists with Bloomberg Economics. “The government might just be about to pull off a great rebalancing.” (…)
GDP related to high-tech industries — including medicine, advanced equipment, information technology and communications equipment and services, and research and development — expanded 12% on average between 2018 and 2023, significantly faster than the nominal GDP growth of 7%. Bloomberg Economics’s projections are based on the assumption that the industries can largely keep their current growth pace. (…)
Across China, weakness in the property market has undermined consumer sentiment, youth unemployment is worryingly high and raging price wars in sectors like automobiles are weighing on company revenues. Yet the government and central bank have held back from switching to stimulus mode as the overall growth rate remains underpinned by surging exports.
Economists say there’s room for more stimulus if the 5% growth target appears out of reach. But Chinese leaders remain firmly wedded to supply-side policies rather than demand-side “welfarism” — something Xi has in the past criticized as a trap that leads to “lazy people.” (…)
Chinese leaders have set an ambitious goal of becoming a “medium-developed country” by 2035 — a goal that would require it to lift per-capita GDP from the current $12,600 level to over $20,000 and maintain growth rates of around 5% a year. Policy advisers point to countries like South Korea, which managed to move up the value chain and avoid getting stuck in the middle-income trap.
To repeat Korea’s success, China needs to lift its productivity through innovation, which would lead to an increase in economic output even when the quantity of inputs like labor and capital stays the same or even contracts. That’s important because China’s aging society means the labor force has been decreasing for a decade, while the return of credit-driven investment from things like bridges and roads is in decline.
China’s total factor productivity — a measure of how efficiently resources are used to generate output — has been stuck at around 40% of that of the US since 2008, according to Wang Yiming, a long-time state adviser. Korea and Japan reached 60% and 80% of US productivity, respectively, before their economic rise relative to the US began to stall. It will be an “uphill battle” for China to push for faster productivity gains, Wang said. (…)
Manufacturing expanded 6.2% last quarter, according to detailed gross domestic product data released Tuesday. That was faster than the 4.7% real growth in the overall economy and kept the sector’s contribution to total activity at 27%, matching the previous quarter’s one-year high. This strength contrasts with the shrinking real estate sector, which contracted for a fifth quarter in a row, the data showed. (…)
Trump was reported earlier this year to be considering a flat 60% tariff on Chinese imports. If that happened, it would cut 2.5 percentage points from China’s gross domestic product in the year that follows, according to a report from UBS economists published Monday.
The forecast is based on an assumption that some trade is diverted via third countries, China doesn’t retaliate and other nations don’t join the US in imposing levies. Half of that drag would come from the drop in exports, while the rest would be from the hit to consumption and investment, they wrote. (…)
UBS forecasts China to expand 4.6% next year and 4.2% in 2026. That rate would be reduced to 3% for both years even with stimulus to counteract the effect of any tariffs, they estimated.
The government may use fiscal measures and ease monetary policy to mitigate the impact of a drastic tariff hike, with funding likely to come from issuing special treasury bonds, the report said. The Chinese central bank may let the currency depreciate 5% to 10%, the economists wrote.