Mission accomplished? Fed chair makes bombshell remark that signals September cut

Fed chair Jerome Powell has said the labor market is no longer a source of inflation, indicating a growing likelihood of a September rate cut.

Tight labor markets often contribute to inflation because employers often need to pay higher wages to their staff, a cost that is often passed on to consumers.

So, while supply chain disruptions and the war in Ukraine are outside the Fed's control, the labor market is what policymakers can influence and pay careful attention to.

The good news is there are signs that things are slowly returning to normal.

Bloomberg columnist Joe Weisenthal argues Powell "came close to declaring mission accomplished" while giving his twice-yearly update to Congress and declaring that the labor market is back to pre-pandemic levels.

"From the Fed's perspective, the inflation driver that it can influence (or at least believes it can influence) through rate policy is gone," he wrote.

While this might be a positive development, there's one thing that Powell didn't provide as he faced a grilling from lawmakers: confirmation of when a rate cut might happen.

According to the CME FedWatch tool, there's a 93.3% chance that interest rates will hold out at 5.25% to 5.5% until the Federal Open Market Committee meets on July 31.

However, the likelihood of a rate cut jumps to a near-lock, 95%, for the following FOMC meeting in September.

"Two-sided risks"

As another sign that Powell's stance is shifting, the Fed chair warned there are now "two-sided risks" when it comes to interest rate decisions.

"If we loosen policy too late or too little, we could hurt economic activity. If we loosen policy too much or too soon, then we could undermine the progress on inflation," he warned.

Another theme Powell touched on during both hearings was the central bank's independence as a response to Donald Trump's call for greater oversight of the Fed.

Powell said keeping monetary policy detached from politics is "a good institutional arrangement that serves the public well," as it allows difficult decisions to be made.

However, it's possible that both worlds could end up colliding anyway, as a September rate cut would come less than two months before the presidential election.

Republican Senator Kevin Cramer said he supported the Fed's independence but cautioned Powell about the timing of any cut.

"Perception matters, and so I would just submit to you … any move to lower interest rates or move interest rates either direction before November 5 could certainly be a bad perception," Cramer warned.