Economists say that Federal Reserve Chair Jerome Powell will set the stage for a September interest rate cut in his speech next week in Jackson Hole. The actual size of the move will depend on the August jobs data that comes out a week later.
In a note to clients, Krishna Guha, vice chairman of Evercore ISI, said that Powell will set the tone for future monetary easing by stressing the need to be “proactive” rather than “reactive” with rate cuts.
The Fed won’t decide on the specifics until September 6, when they see the August employment data.
“This is now a labour data-first Fed, not an inflation data-first Fed,” Guha said. “How aggressively the Fed pulls forward rate cuts will depend on the incoming labour data.”
Powell is likely to continue the Fed chair’s tradition of giving the opening remarks at the Jackson Hole conference on Friday morning next week, though this has not been confirmed yet.
After a sharp drop at the beginning of August, stocks have recovered a lot of that loss and are still up for the year. Even though there was some worry in early August because of a weaker-than-expected July jobs report and the sudden end of the popular Japanese yen carry trade, investors in stocks seem optimistic that the economy will continue to grow. On the other hand, the fed-funds futures market has priced in a deep series of rate cuts that show people are afraid the Fed will have to act quickly to stop the economy from getting worse.
“The main CPI fell below 3% for the first time since March 2021.” An analyst at Global X called Powell “victory lap” in Jackson Hole and said, “Chair Powell should try to talk the market into a 25 basis point cut in September.” “Right now, the futures market is pricing in a cut of almost 50 basis points for September, which is not likely to happen,”
At noon on Wednesday, the Dow Jones Industrial Average DJIA 0.24% was up more than 200 points, or 0.5%. The S&P 500 SPX 0.20% was up 0.4%, and the Nasdaq Composite COMP 0.21% was up 0.4%. Fed-funds futures traders have lowered their bets on a half-point cut in September. According to the CME FedWatch Tool, the chance of such a big move is now around 43%, down from around 53% on Tuesday and 69% a week ago. Traders think that the rate will be cut by a quarter point 57% of the time.
Based on what they know now, two former Fed officials said on Wednesday that the Fed was likely to cut the fed funds rate by 25 basis points at the meeting in September.
Esther George, former president of the Kansas City Fed, said, “I am not in the camp that thinks that a bigger cut in September is where they will land.”
“The July consumer price report is good, but it still shows high inflation,” she said.
Overall, the economy still looks strong, which gives policymakers time to make changes.
Alan Blinder, who used to be Vice Chair of the Federal Reserve, agreed. He said that a 25-basis-point change in September was his first choice, unless the August job report looks “lousy.”
It’s possible for the Fed to make a bigger change if the economy gets worse between now and their next meeting on September 17th and 18th.
Blinder said that neither he nor the Fed thinks this will happen.
Twelve days ago, after the Labour Department released a weaker-than-expected July jobs report, there were high hopes for a 50 basis point cut in September or even an emergency move during the meeting. Investors were scared that the rise in the unemployment rate made a recession more likely.
But since then, comments from Fed officials have shown that they are more optimistic about the economy.
Most economists thought that the July consumer inflation data, which came out earlier Wednesday, was good enough to lead to a rate cut in September.
This is what Guha wrote in his note: how he thought the Fed would react to the August job data.
Guha said that his base case is that the August job report will be better than the previous month. If it is, the Fed will cut rates by 25 basis points at the last three meetings of this year and “as needed” in the first quarter of next year.
The Fed would probably make two 50-basis-point cuts in September and November if the August jobs report kept up this new downward trend.
And if the job market looks like it’s breaking down, the Fed will “kitchen sink it” by cutting rates by 200 to 250 basis points by December.
In the end, he said, it would take a very good report for the Fed to make only two 25-basis-point cuts this year.
