Powell Appears to Signal Rate Cuts Due to Evolving Circumstances
While acknowledging that ongoing uncertainty complicates policymaking, Federal Reserve Chair Powell gave a mostly green light for monetary policy easing in September, following a policy pause that has lasted since the end of last year.
Noting that inflation remains elevated, Powell stated that “the balance of risks appears to be shifting.” In particular, the central bank chair noted that downside risks for the labor market are rising. The implication of this observation is that easing is in view for monetary policy given the Fed’s dual mandate of maintaining both price stability and full employment. Markets expect a cut in September.
Powell detailed an important point for the housing demand, that the labor market has avoided large job losses due to policy tightening and the economy has shown “resilience.”
The Fed chair also indicated that inflation pressure is now in the data from tariffs, including a rise in goods prices. However, Powell articulated the view that although tariffs can affect the price level, that effect may not be a persistent impact on inflation and therefore can be consistent with near-term easing of monetary policy.
He stated, “…the effects will be short-lived – a one-time shift in the price level.” However, he also warned that “one-time” does not mean all at once and that the effects of tariffs will materialize over an adjustment period.
Moreover, although not addressed in today’s comments, some of the pressure from tariffs is being relaxed as trade deals are arranged and de-escalations of some trade tensions are undertaken. This morning’s action by Canada to drop most retaliatory trade actions against the U.S. is a good example, as is the ongoing discussions with China to achieve a fairer, more sustainable trading relationship.
Powell repeated that housing-related inflation remains on a downward trend. NAHB Chief Economist Dr. Robert Dietz added that softening of housing market data (including home price weakness that will indirectly affect inflation data) is a dovish sign for future monetary policy given that housing has been the major source of inflation for the last two years.
Read more of Dietz's insights in this Eye on Housing post.