The Jackson Hole Summit has concluded and was highlighted by the speech from Fed Chair Powell on Friday where he explicitly the way for a rate cut in rate in September. The cut will be the first change in policy since July 2023 when the Fed raised rates by 25 basis points to a high target of 5.50% and will be the first cut in rates since March 2020 when the Fed took the rate to the Covid cycle low at 0.25%.
The Fed started to raise rates 2-years later in March of 2022 with a hike of 25 basis points to 0.50%. Eleven separate policy changes from the low took the target to 5.5% over the next 16 months (reached in July 2023).
The September 18th meeting is all but a done deal on a cut, but the question still remains whether it will be 50 basis points or 25 basis points. The odds of a 50 BP cut is 35% up from 26% on Friday before the Chair comments. The US jobs report next week, will be a key release (September 6th).
So in review, what were some of the key quotes and implications of the quotes from Chair Powell’s speech:
Policy Outlook:
- “The time has come for policy to adjust. 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.”
- Implication: The Fed is ready to adjust its policy stance, including potential rate cuts, but the specifics will depend on future economic data and the overall risk landscape.
On inflation Powell said:
- “Inflation is now much closer to our objective, with prices having risen 2.5 percent over the past 12 months. After a pause earlier this year, progress toward our 2 percent objective has resumed.”
- Implication: The Fed has made significant progress in bringing inflation down towards its 2% target, demonstrating the effectiveness of its restrictive monetary policy. It is time to take the foot off the brake.
On the labor market, Powell said:
- “Today, the labor market has cooled considerably from its formerly overheated state… All told, labor market conditions are now less tight than just before the pandemic in 2019—a year when inflation ran below 2 percent….”We will do everything we can to support a strong labor market as we make further progress toward price stability.””
- Implication: The labor market is less tight than it was before the pandemic, and it is no longer a significant source of inflationary pressure, indicating a successful balancing act by the Fed. The labor market is more balanced and with it the damand for higher wages has abated.
On the Balance of Risks between inflation and the jobs market:
- “The upside risks to inflation have diminished. And the downside risks to employment have increased. As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate.”
- Implication: The Fed is now more closely monitoring both inflation and employment risks, acknowledging that while inflationary pressures have eased, the labor market now faces greater downside risks. Unemployment can beget unemployment. The Fed doew not want to tip the jobs market where company after company announce plan job cuts..
On the Fed’s disinflation success:
- “The 4-1/2 percentage point decline in inflation from its peak two years ago has occurred in a context of low unemployment—a welcome and historically unusual result.”
- Implication: The Fed has managed to reduce inflation significantly without triggering a sharp rise in unemployment, a rare and positive outcome attributed to well-anchored inflation expectations.
On the future Considerations:
- “Our Statement on Longer-Run Goals and Monetary Policy Strategy emphasizes our commitment to reviewing our principles and making appropriate adjustments through a thorough public review every five years.”
- Implication: The Fed remains committed to continuously reviewing and potentially adjusting its policy framework, showing openness to new ideas and a focus on learning from the unique challenges posed by the pandemic.
In addition to the Fed Chair, other Fed officials commented on Thursday and Friday ahead of the Chairs remarks:
- On Thursday, Fed’s Patrick Harker kickstarted Fed policy from Jackson Hole, by highlighing that while the job market is softening, it is doing so from a very high level, and recent job market revisions were not unexpected. He emphasized the importance of balancing risks between inflation and other economic factors, moving away from an exclusive focus on inflation. Harker expressed a preference for a gradual and methodical approach to cutting rates, noting that businesses are more concerned with a predictable and steady path toward neutral rates than with the exact size of the cuts. He acknowledged that the current monetary policy is well-positioned and not overly restrictive. Harker also pointed out that the end of the easing cycle might leave the Fed funds rate around 3%, which could help alleviate pressure on the housing sector. He expects unemployment to rise to just below 5% and continues to monitor the commercial real estate sectors closely. Overall, Harker is ready to begin the process of rate cuts, favoring a cautious and deliberate approach.
- On Friday, Fed’s Raphael Bostic gave some pushback as he expressed the need to see more data. Nevertheless, he expressed optimism about the progress on inflation, noting that it has come down much faster than he anticipated. He added that the quicker-than-expected improvement suggests that the Fed might be nearing a point where it is appropriate to begin cutting rates. However, Bostic emphasized the importance of carefully monitoring upcoming labor market data before making any definitive decisions. He stressed the need for a “calm, orderly return to normalization” in monetary policy, highlighting that while recent economic data has been positive, patience is still necessary. Bostic also acknowledged that markets are eager for the Fed to conclude its tightening cycle, but he reiterated that future actions will be guided by incoming data, with potential outcomes ranging from no rate cut to a 50 basis point reduction. He also estimated the long-run Fed rate at around 3%, indicating a cautiously optimistic outlook for the economy.
- Chicago Fed President Austan Goolsbee emphasized the importance of carefully balancing the Federal Reserve’s dual mandate, particularly with regard to employment. He highlighted that while inflation is on a path toward the 2% target, the Fed’s current monetary policy is the tightest it has been in this cycle, even though rate hikes ceased last July. Goolsbee noted that the job market has shown signs of cooling, but stressed the uncertainty around determining the precise level of a neutral interest rate. He also pointed out that the Fed’s forecasts indicate widespread support for rate cuts, with most committee members expecting multiple reductions over 2024 and 2025. However, the speed and size of these cuts will depend on incoming economic data. Goolsbee underscored that the overall trajectory of rate cuts is more critical than the magnitude of individual cuts, and while there are concerns about consumer strength, recent spending data has been robust.
ECB’s Rehn also gave some comments on the side at Jackson Hole saying the ECB was likely on the path for more cuts saying:
- That European growth outlook appears weaker compared to the U.S. Rehn highlighted that the ongoing disinflationary process, which began in autumn 2022, continues and is supporting the case for a potential rate cut in September. Despite the overall downtrend in inflation, strong inflation in the services sector remains a concern. Rehn emphasized that the ECB already has sufficient data to inform its September decision but remains open to all options, including a 50 basis point cut, stressing the importance of being data-dependent and not committing to any specific action prematurely.
Other news over the weekend from a geopolitical slant:
- In Geopolitical news on Sunday, Israel launched a preemptive airstrike on Hezbollah in southern Lebanon, reportedly using 100 jet fighters to hit 40 locations. This action according to sources, came after Israel detected Hezbollah preparing to launch a large-scale missile and rocket attack on northern and central Israel with the intended target being Mossad, the Isreali spy agency.
The week ahead:
The economic calendar is relatively light this week with:
Monday
- German IFO business climate 86.0 versus 87.0 last month. Current conditions 86.5 estimate versus 87.1 last month. Expectations 86.5 versus 86.9 last month (4 AM ET)
- US durable goods orders for July. Estimate 5.0% versus -6.7% last month. Durable goods ex transportation one is a 0.1% versus 0.4% last month. Nondefense capital goods ex air 0.0% versus 0.9% last month (8:30 AM ET)
- Dallas Fed manufacturing business index for August . Last month -17.5 (10:30 AM ET)
Tuesday:
- US consumer confidence 10 AM ET
Wednesday:
Australia CPI year on year estimate 3.4% versus 3.8% last month (will be released on Tuesday in the US at 9:30 PM ET)
Thursday:
- Preliminary German CPI job .0% versus 0.3% expected (8 AM ET)
- Preliminary US GDP for Q3. 2.8% versus 2.8% advanced (8:30 AM ET)
- US initial jobless claims estimate 234K versus 232K last week 8:30 AM ET)
Friday:
- EU CPI flash estimate YoY 2.2% versus 2.6% last month (5 AM ET)
- Canada GDP MOM estimate 0.1% versus 0.2% last month (8:30 AM ET)
- US Core PCE MoM est 0.2% versus 0.2% last month
Also this week, US company earnings will be highlighted by Nvidia on Wednesday after the close. Crowdstrike and Salesforce will also announce after the close.