Powell Signals Looming Rate Cuts as Fed Shifts Gears Amid Economic Uncertainty
Sunday, Aug 25, 2024 3:00 am ET
2min read Federal Reserve Chairman Jerome Powell has clarified at the Jackson Hole meeting that a rate cut in September is almost certain.
Powell emphasized the increasing downside risks to employment and indicated that it is time for a policy adjustment. While he refrained from commenting on the magnitude and pace of interest rate cuts, it leaves room for future actions. The baseline scenario remains that the Fed will cut rates by 25 basis points in September, but a further 50 basis points cut could be in the cards if non-farm payroll data disappoints again.
Observers believe that lower inflationary pressure and a weakening job market are key reasons for the Fed's readiness to adjust its monetary policy. However, even if the Fed begins to cut interest rates, the high borrowing costs will persist for some time, continuing to drag on U.S. economic growth. The direction of subsequent Fed monetary policies adds significant uncertainty to global financial markets and economic development.
Powell noted that inflation has decreased, and the labor market is no longer overheating. He expressed growing confidence that the inflation rate will continue returning towards the 2% target. The Fed-favored inflation metric, the Personal Consumption Expenditure (PCE) Price Index, has fallen from a peak of 7.1% in June 2022 to 2.5% in June this year.
Despite falling inflation, the high interest rates imposed by the Fed have begun to stifle economic activities, particularly cooling the real estate market and softening the labor market. Powell stated that the labor market has significantly cooled and is unlikely to become a source of increased inflation pressure in the short term. He diverged from a more aggressive stance, stressing the Fed neither seeks nor wants further labor market cooling.
The U.S. Labor Department's recent report revealed that job growth over the past year ending in March was overestimated by about 818,000 jobs, indicating a much weaker labor market than previously thought. The monthly employment report at the beginning of August showed the U.S. unemployment rate rose to its highest level since October 2021.
Market sentiment has shifted in wake of Powell’s announcements, with the Federal Open Market Committee (FOMC) now almost certainly positioned to initiate a series of rate cuts starting September. Financial analysts and economists suggest the Fed's shift is part of a likely prolonged approach to easing monetary policy.
A Senior Economist noted that while the Fed has historically aimed for price stability and full employment, barring significant unexpected changes, the Committee is highly likely to cut rates by 25 basis points in September. However, it may take longer for these cuts to stimulate economic activity due to the incremental nature of the reductions.
According to the Chicago Mercantile Exchange FedWatch Tool, as of the evening of the 22nd, there is a 63.5% probability that the Fed will cut rates by 25 basis points during the September 17-18 meeting, with a 36.5% chance that the cut will be 50 basis points.
As we progress, the economic landscape remains contingent on upcoming data and the Fed's readings of risks and economic dynamics. The market will likely remain responsive to how the Fed navigates this new chapter, signaling varied expectations on the performance of U.S. equities and global markets.
Powell emphasized the increasing downside risks to employment and indicated that it is time for a policy adjustment. While he refrained from commenting on the magnitude and pace of interest rate cuts, it leaves room for future actions. The baseline scenario remains that the Fed will cut rates by 25 basis points in September, but a further 50 basis points cut could be in the cards if non-farm payroll data disappoints again.
Observers believe that lower inflationary pressure and a weakening job market are key reasons for the Fed's readiness to adjust its monetary policy. However, even if the Fed begins to cut interest rates, the high borrowing costs will persist for some time, continuing to drag on U.S. economic growth. The direction of subsequent Fed monetary policies adds significant uncertainty to global financial markets and economic development.
Powell noted that inflation has decreased, and the labor market is no longer overheating. He expressed growing confidence that the inflation rate will continue returning towards the 2% target. The Fed-favored inflation metric, the Personal Consumption Expenditure (PCE) Price Index, has fallen from a peak of 7.1% in June 2022 to 2.5% in June this year.
Despite falling inflation, the high interest rates imposed by the Fed have begun to stifle economic activities, particularly cooling the real estate market and softening the labor market. Powell stated that the labor market has significantly cooled and is unlikely to become a source of increased inflation pressure in the short term. He diverged from a more aggressive stance, stressing the Fed neither seeks nor wants further labor market cooling.
The U.S. Labor Department's recent report revealed that job growth over the past year ending in March was overestimated by about 818,000 jobs, indicating a much weaker labor market than previously thought. The monthly employment report at the beginning of August showed the U.S. unemployment rate rose to its highest level since October 2021.
Market sentiment has shifted in wake of Powell’s announcements, with the Federal Open Market Committee (FOMC) now almost certainly positioned to initiate a series of rate cuts starting September. Financial analysts and economists suggest the Fed's shift is part of a likely prolonged approach to easing monetary policy.
A Senior Economist noted that while the Fed has historically aimed for price stability and full employment, barring significant unexpected changes, the Committee is highly likely to cut rates by 25 basis points in September. However, it may take longer for these cuts to stimulate economic activity due to the incremental nature of the reductions.
According to the Chicago Mercantile Exchange FedWatch Tool, as of the evening of the 22nd, there is a 63.5% probability that the Fed will cut rates by 25 basis points during the September 17-18 meeting, with a 36.5% chance that the cut will be 50 basis points.
As we progress, the economic landscape remains contingent on upcoming data and the Fed's readings of risks and economic dynamics. The market will likely remain responsive to how the Fed navigates this new chapter, signaling varied expectations on the performance of U.S. equities and global markets.
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