Market Analysis

Federal Reserve policymakers are increasingly confident that inflation is cooling sufficiently to allow for future interest-rate cuts. They emphasized that these decisions will be driven by economic data, rather than stock market fluctuations.

This consensus was echoed by three U.S. central bankers who spoke on Thursday, each offering slightly different perspectives on the economy just over a week after the Fed decided to keep interest rates steady, while hinting at possible cuts as early as next month.

A rise in the U.S. unemployment rate in July, reported last Friday, triggered a global stock market sell-off, sparking concerns about a potential recession and the possibility of aggressive Fed action. However, by Monday, equities had partially recovered.

Richmond Federal Reserve Bank President Thomas Barkin downplayed the impact of the stock market on policy decisions, stating that U.S. stock indices remain higher than at the start of the year. Speaking at a virtual event hosted by the National Association for Business Economics, Barkin noted that "all the elements of inflation seem to be settling down" and expressed optimism that this trend would continue.

Barkin also highlighted that the cooling in the labor market appears to be driven by slower hiring rather than an increase in layoffs. He suggested that the economy is transitioning into a more normalized state, allowing for a gradual and deliberate adjustment of interest rates.

Kansas City Fed President Jeff Schmid, known for his hawkish stance, acknowledged the recent volatility in financial markets. He noted that while financial conditions can provide important insights into the economy's trajectory, the Fed must remain focused on its dual mandate of full employment and price stability. Schmid cited recent data showing inflation around 2.5% as encouraging, bolstering his confidence that inflation is moving toward the Fed's 2% target. He added that if inflation continues to decline, it may be appropriate to adjust monetary policy.

Schmid described the economy as resilient, with strong consumer demand and a cooling yet healthy labor market. He emphasized the importance of flexibility in policy decisions, given the significant economic shocks in recent years.

Chicago Fed President Austan Goolsbee reiterated that the central bank's policy is already tight, and maintaining current borrowing costs as inflation falls could further tighten conditions, potentially harming the labor market. Like his colleagues, Goolsbee emphasized that the Fed's focus remains on economic stability, not the stock market or the upcoming presidential election.

"The Fed's out of the election business. The Fed is in the economic business," Goolsbee said in a Fox News interview. "We're not in the business of responding to the stock market. We're in the business of maximizing employment and stabilizing prices."

Paraphrasing text from "Reuters" all rights reserved by the original author.