Stage Set for September Cut — Evening Brief – 08.23.24
Federal Reserve Chair Jay Powell set the stage for an interest rate cut in his speech on Friday at the Fed’s annual Jackson Hole Economic Symposium in Wyoming. While his remarks signaled that there will be a rate cut at the September Federal Open Market Committee (FOMC) meeting, he refrained from going into detail about how aggressively rates would be cut.
“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
Powell noted how the Fed’s attention has shifted within its dual mandate to the labor market from inflation. While he acknowledged recent progress on inflation, which has resumed its downtrend in recent months after stalling earlier in the year, his focus lied more with the labor market, stating, “the balance of risks to our mandates has changed and upside risks to inflation have diminished, downside risks to employment have increased.”
“We do not seek or welcome further labor market cooling”, he added, underscoring the significance of the U.S. jobs report on September 6 and likely dictating the magnitude of the move. According to the CME FedWatch tool, the market is pricing in 73% odds that the Fed will cut interest rates by a quarter-point in September, while the probability of a 50 basis-points reduction stood at 27.5%.
FOMC members appear to be on the same page as Powell. On Thursday, comments by Boston Fed President Susan Collins and Philadelphia Fed President Patrick Harker, in interviews to several media outlets, confirmed the central bank’s dovish stance. Harker noted that he thinks the Fed “needs to start a process of moving rates down” in September, but that he needs to see a few more weeks of data to determine whether 25 basis points or 50 basis points is appropriate. Collins also said she sees it “soon being appropriate to begin easing policy,” and reiterated that “data will tell us what kind of pace makes sense.”
In reaction to the speech, the markets witnessed a broad-based dovish reaction, with U.S Treasury yields sliding across the board and equities rallying sharply – now within 1% of all-time highs – while the U.S. dollar unsurprisingly weakened.
The Fed may have been a bit late to the party, but we are now in this phase where global central banks are involved in a synchronous monetary policy easing cycle and trimming their balance sheets at the same time. This is very stimulative for the liquidity of these economies and potentially positive for risk assets after several years of restrictive policy measures.