Fed Signals Potential September Rate Cut as Inflation Cools

Federal Reserve Chair Jerome Powell has cracked open the door for a potential interest rate cut as soon as September, providing a glimmer of hope that the central bank's aggressive tightening campaign could soon ease.

In his post-meeting comments Wednesday, Powell stated a rate reduction "could be on the table" at the Fed's next meeting if incoming data continues showing inflation cooling toward their 2% target. It marked a shift from the Fed's prior stance of leaving rates unchanged for an extended period.

Powell struck a balanced tone, emphasizing any move will depend on the "totality" of economic data in the weeks ahead. He cited recent figures like June's 2.5% yearly PCE inflation reading and the upcoming jobs report on Friday, which could show hiring has slowed.

A Potential Inflection Point for Markets

If the Fed opts to cut rates in September, it would likely be a 25 basis point reduction, with Powell downplaying chances of a larger 50 bps move. Additional cuts could follow in 2023 if disinflationary forces persist.

The prospect of lower rates provides an upside case for investors hoping the Fed can tame inflation without severe economic damage. Potential cuts could boost risk assets, provide relief for the housing market, and signal pricing pressures are moderating.

However, the path remains highly data-dependent. The Fed is vigilant that continued labor market tightness could fuel stubborn inflationary pressures, undermining any dovish pivot.

Powell aims to nurture a "soft landing" by avoiding overtightening that damages employment. His next comments at the Jackson Hole summit in late August will be closely watched by markets for any new policy signals.

While risks remain, the mere chance of rate cuts as soon as September has given investors renewed optimism that the tightening cycle may be nearing its peak. Whether that optimism is warranted will depend on forthcoming economic data.

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