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Members of the Federal Reserve are hinting at a potential shift towards lowering interest rates, with Boston Fed President Susan Collins and Philadelphia Fed President Patrick Harker both indicating that the central bank might begin easing rates as soon as September.
Their comments came just before Federal Reserve Chairman Jerome Powell's highly anticipated speech at the Jackson Hole Symposium.
Collins expressed to the Financial Times on Thursday confidence in the U.S. economy. Inflation has receded, she said, and the labor market has cooled without raising significant concerns. She indicated that with inflation on track to meet the Fed’s 2% target, it may be time to adjust the benchmark federal funds rate, currently at a 23-year high of 5.25% to 5.5%.
“The timing seems appropriate to begin easing monetary policy. There is a clear path to achieving the Fed’s goals without an unneeded downturn,” the official stated.
She mentioned that a gradual and methodical pace in easing would be most suitable once the Fed changes its policy stance.
Harker echoed Collins’ sentiment in an interview with Market News on Thursday.
He argued that the Fed should start lowering interest rates in September in a methodical manner, allowing businesses to plan accordingly. With the U.S. labor market stabilizing and inflation cooling, Harker believes it’s time to begin the process of normalizing rates.
Harker stressed the importance of not overreacting to single data points, such as the unexpected rise in the unemployment rate to 4.3% in July. He expects the jobless rate to peak below 5%, near its natural rate of around 4.5%, while labor force participation has improved.
On inflation, Harker expressed confidence that the Fed won't face persistent inflation above the 2% target.
“When we start to normalize rates, we’ll see the shelter inflation issue resolve itself over time as capacity comes online. I just don’t see the dynamics in the economy right now leading to a point where we get stuck significantly above 2%,” he said.
Harker emphasized that the key to maintaining business confidence is a well-orchestrated series of rate cuts to bring them back to a neutral level, which he estimates to be around 3%. He highlighted the importance of a predictable process, suggesting that a gradual reduction in rates would be more beneficial than abrupt changes.
Ultimately, the destination for interest rates remains uncertain, but Harker speculated that they could settle around 3%, driven by real data from the market, inflation trends, and labor market conditions.
The U.S. dollar index held session during afternoon trading in New York, up by 0.4% at 3:30 p.m. ET. Treasury yields rose by about 5-6 basis points across the curve, supported by stronger-than-expected private sector activity growth, as monitored through the S&P Global’s Purchasing Managers’ Index (PMI).
Wall Street extended the decline, with the tech sector underperforming the broader market.
The tech-heavy Nasdaq 100 index, as tracked by the Invesco QQQ Trust (NASDAQ:QQQ), tumbled 1.7% at the time of this writing.
The SPDR S&P 500 ETF Trust (NYSE:SPY) fell 0.9%, on track for the worst session since Aug. 5, when it plummeted 3%.
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