Federal Reserve Chair Jerome Powell refrained from specifying a timeline for interest rate cuts in his testimony to lawmakers on Tuesday. However, he highlighted increasing signs of a cooling job market, citing government data that showed a third consecutive month of rising unemployment. Shorter-term Treasuries outperformed on expectations that they would benefit more from potential policy easing.
Powell also mentioned that regulators are nearing an agreement to revise their plan requiring major banks to hold significantly more capital—a significant win for Wall Street lenders. This overhaul is linked to Basel III, an international accord established post-2008 financial crisis to prevent bank failures and another financial crunch.
While Powell’s rhetoric suggested a shift toward preparing the market for a rate cut later this year, he largely adhered to the established economic narrative. Swap traders continue to project two rate cuts in 2024.
Market participants are keenly awaiting a crucial US inflation report later this week. Although the market anticipates a rate cut in September, this expectation is not definitive. A persistently high inflation print could easily alter these probabilities. Traders will gain more insights into inflation trends when the June consumer price index (CPI) is released on Thursday.
Additionally, the government plans to sell $39 billion of 10-year notes in a reopening on Wednesday and $22 billion of 30-year bonds on Thursday. Powell’s cautious approach and the upcoming economic data will be pivotal in shaping the market’s expectations for the Fed’s monetary policy trajectory.