Wednesday, Jerome Powell, the head of the Federal Reserve, put a “heavy thumb” on the scale in favor of lowering interest rates as soon as the next policy meeting in September. When asked what would happen next, he didn’t say much.
Author Johnathan Pingle, an economist at UBS, told MarketWatch, “There hasn’t been a lot of talk about what happens” after September.
When the Fed met on Wednesday, its interest rate stayed the same, somewhere between 5.25% and 5.5%. Rates have been this high for a year.
After the press meeting, economists said it looks like the rate will be cut in September. To put it another way, the next six weeks of data would have to persuade the Fed to wait.
Traders in derivative markets have put in some aggressive easing after September. This is interesting, but it’s not getting much attention. They think that the Federal Reserve will lower its key interest rate at each of its meetings in November, December, January, and March.
Some experts even think the market is being too cautious and expect rates to drop by 200 basis points soon.
The idea behind these predictions is that the Federal Reserve’s current rate of interest is “restrictive,” which means it is making people less likely to buy things.
The job market is getting weaker, so markets and experts think the Federal Reserve will try to get to a neutral rate as quickly as possible, which means that it won’t slow down growth. What would an equal rate be? The central bank thinks that rate is close to 3% right now.
When asked about the direction of policy in the future, Powell said he didn’t want to say anything specific about “the pace” of future cuts.
Powell said, “I can imagine a scenario in which there would be anywhere from zero cuts to several cuts.” This year, the Fed has three more meetings, in September, November, and December.
After that, he said that the Fed needs to be humble when it gives forward advice. He said, “Nobody has a clear picture of the future in terms of the reaction function.”
Pingle of UBS said, “Powell had the chance to fight back against market prices, but he didn’t.” “That will make people in the market feel even better about that forecast.”
According to the Fed’s own predictions, rate cuts will happen less quickly every three months. The consensus dot on the Fed’s “dot-plot” shows that the benchmark rate will be just above 4% by the end of 2025.
Pingle said that he thinks the central bank will change “some communication shift” that will make rate cuts more dependent on how inflation is moving and the risks to the job market.
When Powell talks at the central bank’s summer retreat in Jackson Hole, Wyo., on Aug. 23, many economists, including Pingle, think that he may lay out the way forward.
Deutsche Bank’s head U.S. economist, Matt Luzetti, thinks the Fed will cut rates three times quickly and then take a break to see how the economy changes. This is like the change made in the middle of the cycle in 1995.
Earlier this year, Fed Vice Chair Philip Jefferson said that the period of easing that began in July 1995 has been called the “so-called perfect soft landing.”
Jefferson said, “In this easing cycle, the FOMC started to ease when it saw that concerns about inflation were fading. It held rates steady for three meetings while it waited for more information, and then it kept easing.”
Pingle said that the Fed might have a good plan there, but they haven’t told the markets about it.
Chief economist at Pantheon Macroeconomics Ian Shepherdson believes that the Fed will cut rates quickly because the job market is much weaker than most people think.
“We still expect a 25 basis-point easing in September, followed by 50bp at both the November and December meetings, as the Fed tries to get ahead of the slowdown,” Shepherdson said.
Jeffrey Lacker, who used to be president of the Richmond Fed, is one economist who wants the Fed to be careful about cutting rates. He thinks it’s possible that the Fed will have to raise rates in the next 18 months.
Some economists think that Donald Trump’s plans for the economy could lead the Federal Reserve to tighten policy.
Powell made it very clear that the Federal Reserve will not be considering policy ideas from candidates so long before they are put into action.
