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Bank of America: Powell's Jackson Hole Speech Signals Imminent Rate Cut, Policy Shift

AInvestFriday, Aug 23, 2024 3:34 pm ET
1min read

Fed Chair Jerome Powell’s recent speech at the Jackson Hole Economic Symposium has significantly bolstered market expectations for a rate cut in September, according to analysts at Bank of America (BofA).

The speech marks a notable shift in the Federal Reserve's policy focus, emphasizing a move away from strict inflation management towards a more balanced approach that prioritizes labor market stability.

In his remarks, Powell highlighted that the risks associated with inflation have notably diminished, while concerns regarding the labor market have increased. This shift signals the Fed’s recognition of a cooling labor market that, while no longer overheated, now presents downside risks that the central bank is keen to avoid exacerbating.

Powell's comments suggest that the Fed is transitioning from a period of aggressive rate hikes aimed at controlling inflation to a more cautious approach that seeks to avoid further weakening of the labor market. This dovish tone has led markets to moderately increase their expectations for rate cuts in 2024 and 2025.

One of the key takeaways from Powell’s speech is his assertion that the rising unemployment rate has not been driven by elevated layoffs, which typically signals an economic downturn. Instead, the current labor market dynamics suggest a normalization process rather than a precursor to recession.

This perspective reinforces the view that the Fed's upcoming rate cuts will be gradual, likely in increments of 25 basis points per quarter, starting in September.

While the possibility of a 50 basis point cut was not entirely ruled out, Powell’s language indicates that such a move would only be considered if there were significant deterioration in economic conditions, particularly in the labor market.

However, with the recent decline in jobless claims, BofA analysts do not see this as the base case scenario.

Overall, Powell’s speech has provided clarity on the Fed's policy trajectory, with a clear emphasis on gradual rate reductions aimed at maintaining economic stability without triggering unnecessary labor market stress.

As the market prepares for the September Federal Open Market Committee (FOMC) meeting, the focus will remain on incoming economic data, particularly labor market indicators, which will guide the Fed's decisions in the months ahead.

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