After the U.S. consumer price index (CPI) for June slowed down more than expected, San Francisco Fed President Mary Daly and Chicago Fed President Austan Goolsbee both came out to praise and hinted that the timing for a rate cut is approaching.
Moreover, following the release of the latest inflation data, the market has increased its bets on a rate cut starting in September and two or three cuts within the year. Data from the CME FedWatch tool shows that the market currently estimates an 86.4% chance of a rate cut by the Fed in September, up from the previous 70%, and has advanced the bet on the second rate cut to November, with a 43.8% chance of three rate cuts by the end of the year.
However, St. Louis Fed President Alberto Musalem tries to ask the market to calm down: He said that recent data, including Thursday's CPI report, show that the Fed is moving closer to its 2% inflation target, but he wants to see more evidence of inflation slowing down before he would support a rate cut.
Musalem emphasized that the data from May and June indeed indicate a slowdown in inflation, but he needs more evidence. Musalem also said that the possibility of a U.S. economic recession this year is very low, probably only 20% or less. He expects the U.S. economy to grow by about 1.5% to 2% this year. He pointed out that if the economy weakens further, especially the large service industry, he will be more confident that inflation will fall back to the Fed's 2% target.
The service industry has been a major source of inflation due to strong demand and rising labor costs. Musalem said that if demand slows down, it will be easier to get rid of shortages or other economic bottlenecks and maintain low inflation.
He also pointed out that the labor market is still strong and said that the Fed has time to assess more data before making policy adjustment decisions. He said that the Fed's current policy stance is restrictive but not excessive.
Musalem took over as the St. Louis Fed President in April this year, and he is not a voting member this year. He said last month that it is more likely to need several quarters rather than several months to get all the data to support a rate cut.
Finally, although Fed officials are still committed to curbing inflation, the labor market has become a focus as unemployment continues to rise. Musalem pointed out that a further reduction in job vacancies in the future may lead to an increase in unemployment. Although the unemployment rate remains at a low level of 4.1%, it has been rising every month for the past three months.