Former Federal Reserve Bank of St. Louis President James Bullard says the Fed is likely to turn dovish over the coming weeks and months.
In a CNBC interview, Bullard says the tightening of monetary policy in the US over the past 24 months has yielded success without negatively impacting the economy after the Fed’s preferred inflation measure, Personal Consumption Expenditures (PCE) price index, increased at 2.6% in line with expectations.
With inflation slowing down, Bullard believes the Fed is now in a position to start a rate-cutting cycle.
“This was a good report right on track with what markets were expecting. This will put the Fed squarely on a rate cut in September, and I think it’s going to be 25 basis points. And I think the debate now will shift out to the November/December meeting, and I think the baseline there is 25 basis points at each of those meetings as well.
And it is a soft landing, and I think it has been achieved.”
According to Bullard, a September rate cut is set in stone but the Fed might pause during the subsequent meetings if surprising data shows up.
“If you got a surprise in any of the upcoming reports, I don’t think it would affect September. It would affect the debate about what to do later this year and focus on November. So, for instance, if the payrolls report was very hot and showed a thriving jobs market, that might call November into question about whether the committee would do anything there.
If it was a very weak report, let’s say you know close to zero or something, then you might get a debate about whether they need to do more.
But I think the do-more would be farther out in the future not at the September meeting. Because I think they would just shrug off any data that’s coming between now and the meeting as just one data point. And they wouldn’t probably react to that.”
According to the CME FedWatch tool, the likelihood of a rate cut of 25 basis points at the September Fed meeting is currently at 59% while the odds of a rate cut of 50 basis points stand at 41%.
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