On July 31, Fed chair Jerome Powell gave a major hint about where interest rates are headed next.

In a press conference following the Fed’s decision to leave interest rates unchanged at 5.5%, Powell acknowledged that the labor market was no longer “overheated.”

Economists took this to mean that higher interest rates are no longer necessary.

“Powell let the cat out of the bag,” wrote economist David Rosenberg. “The economy is not overheating but is normalizing,” he explained.

Rosenberg said that, by the Fed’s logic, the current federal funds rate can only be justified in an overheated economy. If the economy is normalizing, it needs a “normalized” policy rate of 2.75%, which is half the current level.

“So, the timing may be up for debate, but not the destination,” Rosenberg said, referring to rate cuts.

Rosenberg’s commentary is consistent with Powell’s admission during the press conference that the central bank had made “further progress” toward achieving its 2% inflation target.

In June, headline inflation reached a multiyear low of 3%, marking a major improvement from the 40-year peak of 9.1% set two years earlier.

Other inflation measures, such as the core Personal Consumption Expenditures (PCE) index, are also nearing the Fed’s goal. The core PCE stood at 2.6% in June, just an inch away.

For these reasons, Powell said the central bank is “getting closer to the point at which it’ll be appropriate to reduce our policy rate.”

Better late than never

Several economists, including David Rosenberg, believe the Fed should have already cut interest rates by now. Nevertheless, Moody’s chief economist Mark Zandi says a rate cut in September is “better late than never.”

“They’re ready to cut, just as long as we don’t get an inflation surprise between now and September, which we won’t,” Zandi predicted.

Bharat Ramamurti, who served as an economist in the Biden White House, said it would be a shame for the Fed to make so much progress only to further delay rate cuts because it hasn’t yet achieved its target.

“The finish line is in sight, and it would be tragic for the Fed to stumble and fall, with one-tenth of a mile left in the marathon, which is what I think they would be doing if they don’t start cutting,” he told the Associated Press.

The good news is that Powell has already told Congress that he won’t wait that long before cutting interest rates. In his view, waiting too long is almost as bad as cutting rates too soon.

The Federal Open Market Committee will announce its next interest rate decision on Sept. 18, following its two-day meeting.

The September announcement will be delivered alongside policymakers’ revised projections for GDP growth, unemployment, inflation, and interest rates.