Powell Signals Looming Rate Cut: Labor Market Woes Prompt Fed's Dovish Turn
Saturday, Aug 24, 2024 11:00 pm ET
2min read Federal Reserve Chairman Jerome Powell sent a clear signal for a rate cut at the Jackson Hole meeting, making a September cut almost a certainty. Powell emphasized that the risks to employment have increased, suggesting that the time for policy adjustment has arrived. The Federal Reserve is committed to supporting the labor market to the fullest extent possible.
Powell did not comment on the magnitude and speed of the rate cuts, leaving room for future adjustments. The baseline scenario remains a 25 basis points cut in September, but if non-farm payroll data continues to disappoint, a 50 basis points cut could be on the table. The market reacted positively to Powell's early announcement of rate cuts, which addressed concerns that the Fed was "behind the curve". Investors believe that if the labor market continues to weaken, the Fed will act decisively.
The backdrop to this year's Jackson Hole meeting was one of easing inflation in the United States, albeit with an uptick in unemployment rates, raising market concerns that the Fed's policy might be too slow to respond. Powell underscored that employment risks are increasing, indicated by slower job growth, reduced job vacancies, and lower hiring and quit rates compared to pre-pandemic levels. These signs unmistakably indicate that the labor market is cooling. Although the recent rise in unemployment mainly reflects increased labor supply and a slowdown in hiring frenzy, Powell stated that the Fed does not seek or welcome further cooling of the labor market.
Powell's confidence in inflation falling back to the 2% target has grown, indicating the Fed is ready for a rate cut. The monetary policy of the Fed is now aimed at balancing inflation control with employment stabilization.
Despite the clear signal for a September rate cut, Powell provided no specifics on the magnitude or pace of cuts, maintaining his cautious stance and keeping future options open. Consequently, the baseline prediction remains a 25 basis points cut in September, with a potential 50 points cut if forthcoming data is weak. In the medium term, the space for monetary easing is constrained by ongoing fiscal expansion in the U.S.
The fiscal measures, rather than tightening, are expanding, which could increase economic resilience and inflation stickiness, limiting the Fed's ability to cut rates aggressively. Increased government debt issuance also raises the pressure on interest rates, suggesting limited downward room for rates.
Despite the limited new information, Powell's comments helped ease market worries about the Fed being behind the curve, lifting investor sentiment. This dovish stance implied a reassurance for investors, hinting at a "Fed put," believing the Fed would act quickly if labor market conditions deteriorate further. Powell reiterated that the current policy rate provides ample room to respond to any risks, including further weakening in labor market conditions.
Powell’s remarks also boosted market confidence in a smooth economic landing, enhancing risk appetite. By reviewing the inflation trends of the past four years and how inflation decelerated without a significant rise in unemployment, he highlighted that various factors, including supply-side improvements and controlled inflation expectations, contributed to the steady decline in inflation.
As a result, Powell's assessment suggests an increased likelihood of a soft landing for the U.S. economy, with favorable supply-side shocks, quick global supply chain recovery, increased labor supply through immigration, and productivity improvements through remote working and AI technologies contributing to this outlook.
Powell did not comment on the magnitude and speed of the rate cuts, leaving room for future adjustments. The baseline scenario remains a 25 basis points cut in September, but if non-farm payroll data continues to disappoint, a 50 basis points cut could be on the table. The market reacted positively to Powell's early announcement of rate cuts, which addressed concerns that the Fed was "behind the curve". Investors believe that if the labor market continues to weaken, the Fed will act decisively.
The backdrop to this year's Jackson Hole meeting was one of easing inflation in the United States, albeit with an uptick in unemployment rates, raising market concerns that the Fed's policy might be too slow to respond. Powell underscored that employment risks are increasing, indicated by slower job growth, reduced job vacancies, and lower hiring and quit rates compared to pre-pandemic levels. These signs unmistakably indicate that the labor market is cooling. Although the recent rise in unemployment mainly reflects increased labor supply and a slowdown in hiring frenzy, Powell stated that the Fed does not seek or welcome further cooling of the labor market.
Powell's confidence in inflation falling back to the 2% target has grown, indicating the Fed is ready for a rate cut. The monetary policy of the Fed is now aimed at balancing inflation control with employment stabilization.
Despite the clear signal for a September rate cut, Powell provided no specifics on the magnitude or pace of cuts, maintaining his cautious stance and keeping future options open. Consequently, the baseline prediction remains a 25 basis points cut in September, with a potential 50 points cut if forthcoming data is weak. In the medium term, the space for monetary easing is constrained by ongoing fiscal expansion in the U.S.
The fiscal measures, rather than tightening, are expanding, which could increase economic resilience and inflation stickiness, limiting the Fed's ability to cut rates aggressively. Increased government debt issuance also raises the pressure on interest rates, suggesting limited downward room for rates.
Despite the limited new information, Powell's comments helped ease market worries about the Fed being behind the curve, lifting investor sentiment. This dovish stance implied a reassurance for investors, hinting at a "Fed put," believing the Fed would act quickly if labor market conditions deteriorate further. Powell reiterated that the current policy rate provides ample room to respond to any risks, including further weakening in labor market conditions.
Powell’s remarks also boosted market confidence in a smooth economic landing, enhancing risk appetite. By reviewing the inflation trends of the past four years and how inflation decelerated without a significant rise in unemployment, he highlighted that various factors, including supply-side improvements and controlled inflation expectations, contributed to the steady decline in inflation.
As a result, Powell's assessment suggests an increased likelihood of a soft landing for the U.S. economy, with favorable supply-side shocks, quick global supply chain recovery, increased labor supply through immigration, and productivity improvements through remote working and AI technologies contributing to this outlook.