Federal Reserve Chair Jerome Powell said on Friday “the time has come” for the U.S. central bank to cut interest rates as rising risks to the job market left no room for further weakness and inflation was in reach of the Fed’s 2% target, offering an explicit endorsement of an imminent policy easing.
“The upside risks to inflation have diminished. And the downside risks to employment have increased,” Powell said in a highly anticipated speech to the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming. “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.”
North American markets rallied on the news.
Here’s what market strategists and other investment professions are saying:
MICHAEL GREGORY, DEPUTY CHIEF ECONOMIST, BMO CAPITAL MARKETS
The FOMC was closer to cutting rates at the end of last month than originally assumed. And, given the data flow since (e.g., the 0.2 ppts jump in the jobless rate and further ebbing of the shorter-term inflation trends), Chair Powell’s Jackson Hole speech confirmed that the Fed is now at the point of paring. Indeed, we judge we’re also now at the point where the data no longer have to persuade the Fed to cut policy rates. The easing thresholds of further “good” data on inflation and no further weakening of the labour market data have been crossed. However, the data can still dissuade the Fed from cutting at a specific confab (timing) and they can still determine if a bigger-than-25-bp action is warranted (magnitude). The next reports on employment (Sept. 6) and the CPI (Sept. 11) still have roles to play (along with next week’s complex of PCE-related figures). On balance, our Fed call remains the same, we expect a sequence of quarter-point rate cuts beginning on September 18 with the easing cadence slowed after March as policy rates head into the 3% range. And the net risk also remains the same, that rates could be cut even more aggressively.
JAMES ORLANDO, SENIOR ECONOMIST, TD
“Today’s speech follows similar rhetoric from other Fed members and the minutes from the July policy meeting, which revealed that downside risks to the economy have become the top priority at the Fed. While Chair Powell didn’t give much in terms of the expected pace of cuts, it didn’t seem like an oversized 50 basis point (bp) cut is warranted at this time. We maintain our view that the Fed will proceed with 25 bp cuts at each of its next three meetings over 2024, bringing the policy rate to 4.75% by year-end.”
TAYLOR SCHLEICH, ECONOMIST WITH NATIONAL BANK FINANCIAL
Prior to the speech, markets were placing lofty odds on a larger-than-25 basis point rate cut at some point over the balance of the year. While not explicitly embracing that view, he certainly did not take these off the table. With inflation confidence growing, it’s clear that the labour market is going to guide the pacing of the easing cycle. The statement that they “don’t seek of welcome” further labour market cooling suggests the bar to a 50 basis point cut is much lower than we had anticipated. Again, data will guide coming decisions, and a status quo jobless rate probably won’t lead to 50-bpers but it may not take much of a further increase to drive a more aggressive policy response. That puts the September 6th jobs data squarely in focus and will likely dictate the size of September’s cut, with the decision to ease already a settled matter.
STEPHEN BROWN, DEPUTY CHIEF NORTH AMERICA ECONOMIST, CAPITAL ECONOMICS
We continue to think that temporary factors pushed up the unemployment rate in July, which leaves scope for it to stabilise or even drop back in August, and should mean that the Fed remains comfortable with a 25 bp cut. If the unemployment rate instead rises further, then the Fed would likely respond with a 50 bp cut at the 17th-18th September policy meeting.
After that initial policy signaling, Powell focused on the reasons for the prior rise and subsequent fall in inflation, in brief blaming the combination of aggressive stimulus policies and constrained supply. There was little to guide us on the path of policy beyond the next meeting, although the dovish tone today suggests that our forecast of 25 bp cuts at each meeting is perhaps the least we can expect.
STEVE ENGLANDER, HEAD OF GLOBAL FX RESEARCH AND MACRO STRATEGY STANDARD CHARTERED BANK, NEW YORK
“I think the markets’ reaction, which has been the dollar a bit weaker, bond yields a bit lower, is about right. It’s not like he said ‘Yeah, were going to do three 50s to begin the easing cycle.’”
“What he did was very much focus on the fact that the inflation target is in sight, that they are worried about the labor market, saying that the labor market doesn’t have to weaken any further. So, implicitly, it opens the door to 50s at some point without giving a timetable for it. We still don’t think 50 is going to be the first move, but it could come quickly if the labor market continues to weaken.”
DAVID DOYLE, HEAD OF ECONOMICS, MACQUARIE GROUP, TORONTO
“Powell has set the stage for rate cuts to commence in September. The extent of easing in coming months will depend on the incoming data tape with the labor market playing an important role in this.”
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA RESEARCH, ALLENTOWN, PA
“I felt a little surprised that he was pretty clear in his statement that inflation is coming down. They are confident that inflation will continue to come down and that employment has not been adversely affected.”
“He wants to let the markets know that the Fed is not behind the curve. By being as clear about the likelihood of a rate cut in September, he’s actually cutting rates a month early.”
“Powell was clear about the first rate cut, but not so much about the next ones, so I don’t think he’ll be exploding out of the blocks with a 50 basis point cut. But I think slow and steady is how the Fed wants to pace this early part of the easing.”
ELIAS HADDAD, SENIOR MARKETS STRATEGIST AT BROWN BROTHERS HARRIMAN, LONDON
“The reason why the message from Powell is on the dovish side is because he’s increasingly concerned about the U.S. labor market. You’ve got reasonably strong growth in the U.S. with the central bank that’s about to ease policy. It’s the perfect cocktail sauce for a rally in equities. This will carry on into next week or at least until we see the next employment numbers. You need a stronger-than-expected nonfarm payroll gains to reverse this.”
ANDRE BAKHOS, MANAGING MEMBER, INGENIUM ANALYTICS LLC, PLAINSBORO, NEW JERSEY.
“I now expect (a) 50 bps cut but the caveat would be if the job market numbers are very weak come early September. That could certainly sway a 50 bps into a 75 bps cut.”
“The longer term trends in stocks are rock solid and any weakness is an opportunity to add exposure. But again, in short term, we’re going to get that choppy, erratic, volatile moves because no one really knows what happens now that he has (Powell) shown his hand and said what everyone expected. We’re going to have to see how this play out.”
GLEN SMITH, CHIEF INVESTMENT OFFICER, GDS WEALTH MANAGEMENT, TEXAS
“Powell’s Jackson Hole comments all but assure a 25 basis point rate cut in September, as the Federal Reserve has been telegraphing for quite some time now. The September meeting is three weeks away and there are only a handful of jobs and inflation data points to be released until then and it’s unlikely that these next few data points will change the Fed’s plans to cut rates by 25 basis points next month.”
“While a September rate cut is essentially a done deal at this point, the more important question is whether this will be a one and done rate cut, or if it will be the beginning of a more substantial cutting cycle, and that will be determined by the economic data over the next two to three months. The market is pricing in multiple rate cuts over the next 12 months, although we remind investors that the market has a history of being too optimistic about rate cuts.”
“We have now seen more evidence than ever that a soft landing has been achieved. Since the post-Covid uptick in inflation, consumer prices are now closer than they have ever been to the Fed’s 2% target. While there has been a slowing of economic data, that’s very different from a recession.”
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO
“He noted growing concern about the job market and that’s really helping to ratify market expectations for multiple cuts through the autumn months. I think the key sentence there is that they’ll ‘do everything we can to support a strong labor market as we make further progress toward price stability.’ So that to me does suggest that he’s acknowledging the growing concern among policymakers around the direction of labor markets.”
“He does not put a 50-basis point cut on the table for September, and I think that that is somewhat in line with what markets have been anticipating as well.”
WASIF LATIF, PRESIDENT AND CHIEF INVESTMENT OFFICER, SARMAYA PARTNERS, PRINCETON, NEW JERSEY
“We’re seeing from the price action that markets are rejoicing. It’s finally getting the candy that it’s been anticipating from the Fed. In terms of rate cuts, the forward guidance has been somewhat mixed depending on who from the Fed has been talking. But obviously when you hear from the chair, he speaks for the entire committee. And now it’s unequivocally there, the guidance is there, that rates cuts are coming. Markets are rejoicing off that. Markets have been anticipating this candy and now it’s getting the candy. But just like a lot of candy, there’s this immediate sugar rush and then comes the reckoning that we still need to go through.”
PAUL CHRISTOPHER, HEAD OF GLOBAL STRATEGY, WELLS FARGO INVESTMENT INSTITUTE, ST. LOUIS, MISSOURI
“There’s no question they’re going to cut rates but the question is how much ... It’s more dovish than what I would’ve expected because the labor market really isn’t at a level that approaches recession from the data we’ve seen. After all we heard Fed officials yesterday argue for gradual and methodical approaches.”
“Today you hear the Fed chair leading off with statements like not seeking or welcoming further cooling in labor market conditions.”
“It signals that they’re definitely going to cut rates. Can they still be gradual yes. It’s a positive message. It’s a clear message. Is it a signal to throw all your cash into the market? No. They’re still going to be gradual and the market may still be getting ahead of itself on how quickly the Fed will deliver.
Therefore we think there’ll be more volatility in this market going into the end of this year.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“Powell is on the dovish side, saying there’s ample room to respond to any risk we may face. I think that’s the key.”
“What he’s suggesting here is if the labor market continues to weaken, we’re looking at a 50-basis-point rate cut in September as opposed to 25.”
“‘The time has come for policy to adjust,’ and ‘we do not seek or welcome further cooling in labor market conditions.’ That’s another key point and it tells me we’re looking at a 50 bp cut in September.”
“He seems that he’s responding to the big benchmark revision we had the other day.”
“He’s also saying that confidence has grown that inflation is on its way back down to 2%. This is a dovish Powell today, and we see markets responding accordingly.”
“I think we’ll have two cuts, a total 75 bp this year, especially if the labor report for august should indicate further weakness.”
UTO SHINOHARA, MANAGING DIRECTOR AND SENIOR INVESTMENT STRATEGIST, MESIROW, CHICAGO
“Powell validated market expectations for a September rate cut while continuing to anchor on data dependency and economic outlook going forward.
“FX is a relative game, so the expectation for the Fed to join the other major banks soon in cutting rates is driving the dollar lower. Although the dollar is under pressure, the implied rate cut estimates have not moved significantly – the September meeting expectation is still around 30bps and total expected cuts by year-end only increased from around 95bps to 100bps right now.
“With inflation on a path towards target, the risks associated with employment take on a larger role going forward on the heels of the large negative payrolls revision, and the Fed reaction to employment prints will continue to move the dollar.”
Globe staff with files from Reuters
Federal Reserve Chair Jerome Powell on Aug. 23 endorsed an imminent start to interest rate cuts, saying further cooling in the job market would be unwelcome and expressing confidence that inflation is within reach of the U.S. central bank's 2 per cent target.
Reuters
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