Powell, the Fed's White Rabbit: Overdue for a rate cut?

In a world where financial markets seem as unpredictable as Wonderland, it's no surprise to see Jerome Powell dressed as the White Rabbit. "Late, late, I'm late!" he might exclaim, as the Fed has yet to begin lowering its key rates, unlike its counterparts who have already taken the lead.

Yet the latest economic statistics seem to argue in favor of a rate cut. Growth remains moderate but sustained despite the economic tightening, and inflation continues to fall slowly. July's figures on producer and consumer prices confirm this downward trend, while employment data have risen slightly, underlining the start of an economic slowdown.

All the indicators seem to be turning green, making it possible to cut key rates without causing prices to soar again. Even if, it has to be said, this level of rates, which has persisted for over a year, has enabled the Fed to achieve a satisfactory balance between curbing inflation and maintaining economic activity. But now that the overheating of prices seems to be subsiding, and economic activity is flagging a little, it may be time to inject liquidity back into the system by reducing the cost of financing.

Nevertheless, with a key rate of 5.33%, the Fed once again distinguished itself by its prudence at the July meeting. By comparison, the Bank of England is at 5%, Canada at 4.5%, Australia at 4.35%, the European Union at 4.25%, Switzerland at 1.25%, and Japan at 0.25%. But Powell and his colleagues insisted on the need for irrefutable proof that inflation, which has reached heights not seen since the 1980 crisis, is falling back towards the Fed's 2% target. In July, it was still at 2.9%, and they feared that cutting rates too soon would send inflation back up again for many months to come.

But while this approach may help curb price rises, it could prove risky for the labor market. The latest employment report underlined this concern, showing unemployment at 4.3% in July, up for the fifth consecutive month.

Jerome Powell therefore needs to find the right balance to ensure a soft landing for the US economy. Let's hope he's not too late, as Fed policy moves like an ocean liner, and a rate change now will not be immediately visible on the real economy. So we mustn't be too quick, but not too late either, at the risk of a recession.

Today, Powell should shed a little more light on the subject, as he will be speaking at the annual Jackson Hole symposium, a not-to-be-missed event for monetary policymakers. With less than a month to go before the Fed's likely first rate cut since March 2020, investors are expecting Powell to reinforce and confirm the market's conviction.

So, will Powell, our White Rabbit, be late or right on time?