Fed move to hinge on economic data

FEDERAL Reserve policymakers are increasingly confident that inflation is cooling enough to allow interest rate cuts ahead, and they will take their cues on the size and timing of those rate cuts not from stock market turmoil but from economic data.

That was the shared message of three US central bankers speaking on Thursday, who otherwise had slightly different takes on exactly where the economy stands a week and a day after they decided to hold the policy rate steady but signaled a reduction as soon as next month.

A jump in the July US unemployment rate reported on Friday last week helped spark a global stock market rout that continued into Monday before equities partially recovered, as investors and analysts worried the US was headed for a recession and the Fed would need to react aggressively.

«It's hard to make the case that something has just happened that is monumental on the equity side,» Richmond Federal Reserve Bank President Thomas Barkin said on Thursday, noting major US stock market indices are still up from the start of the year.

More to the point on policy, he said at a virtual event put on by the National Association for Business Economics, is «all the elements of inflation seem to be settling down [and] I'm relatively hopeful based on the conversations I'm having that that's going to continue.»

Those same conversations with business leaders also suggest the cooling in the US labor market is coming from slower hiring rather than a rise in layoffs, he said.

«I think you've got some time in a healthy economy to figure out whether this is an economy that's gently moving into a normalizing state that will allow you to, in a steady deliberate way, normalize rates, or… is this one where you really do have to lean into it.»

Kansas City Fed President Jeff Schmid, one of the US central bank's more hawkish policymakers, also took note of the recently roiled financial markets.

«Financial conditions can both reveal important information on the trajectory of the economy and can also spillover to impact the real economy,» he said in remarks prepared for delivery to the Kansas Bankers Association's annual meeting in Colorado Springs, Colorado.

«Howeve