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After weeks of mounting expectations for the Federal Reserve to ease monetary policy, comments this week from Chair Jerome Powell have helped bring the potential timeline for the central bank's next move into sharper focus.
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While persistently elevated inflation continues vexing policymakers, Powell acknowledged growing signs that price pressures are easing an the previously overheated economy is transitioning to a more sustainable pace. Those dynamics have markets betting the Fed will pursue its first interest rate cut of the cycle as soon as the September 19-20 meeting.
"The most recent labor market data do send a pretty clear signal that conditions have cooled considerably compared to where they were two years ago," Powell told U.S. lawmakers during semi-annual Congressional testimony on Tuesday. "This is no longer an overheated economy."
Critically, the Fed chair stressed the risks to achieving the central bank's dual mandate of price stability and maximum employment are "coming much more into balance." But he remained insistent that more confirming evidence of a disinflationary trend is still needed before pulling the trigger on rate reductions.
"The inflation numbers have shown some modest further progress... and more good data would strengthen our confidence that inflation is moving sustainably toward 2%," Powell stated.
On that front, this week's June Consumer Price Index report on Thursday will provide the latest inflation temperature check. Economists expect the annual "core" CPI reading, which strips out volatile food and energy costs, to hold steady at 3.4% - still uncomfortably above the Fed's 2% target.
However, even a steady reading should keep alive hopes for an easing cycle to commence in September, provided subsequent July and August inflation reports continue moderating. That would give the Fed a full quarter's worth of evidence that price pressures are indeed abating.
Powell's insistence on letting the data guide policy also aligns with investors' expectations pricing in a 70% probability of a quarter-point rate cut at the September meeting, according to CME Group's FedWatch tool.
"We're increasingly confident in our forecast that the Fed will cut rates in September," wrote Ryan Sweet, chief U.S. economist at Oxford Economics.
Of course, the Fed chair left the door open to revising that prospective timing if economic conditions were to materially change. An upside inflation surprise could theoretically delay rate cuts until officials see more progress on that front.
Conversely, if the disinflation trend accelerates more rapidly accompanied by clear labor market degradation, the Fed may feel compelled to pull the easing trigger even sooner at the July 25-26 meeting. Though that scenario appears less likely based on Powell's tone of patience and insistence on gradual adjustments.
"The Fed wants to avoid having to reverse course on rate cuts, which argues for a more measured pace of easing," said Nationwide's chief economist David Berson.
Absent a shockingly poor inflation report this week, the smart money remains on September as the most probable liftoff for rate cuts. That assumes, of course, the economic trajectory continues playing out according to the Fed's baseline outlook.
"Policy will be data-dependent and not on any pre-set course," Powell reiterated in his Congressional testimony. "We will make our decisions meeting by meeting."
For market participants awaiting that pivotal policy pivot, September is increasingly shaping up as the key month to watch.
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