Federal Reserve Board Chair Jerome Powell’s much-anticipated speech at the Jackson Hole symposium should offer clues about the Fed’s thinking ahead of its September meeting, but with limits.
“Fed watchers will be parsing Powell’s comments for signs that a 50bp rate cut is on the table for September,” noted Lauren Saidel-Baker, an economist with ITR Economics. “However, the notoriously tight-lipped chair is unlikely to confirm this, making a 25bp cut the most likely outcome.”
The speech “will almost certainly signal that the Fed is prepared to begin its rate-cutting cycle,” she said, as economic reports have suggested a disinflationary trend and labor market softening. “Taken together with recent Fedspeak and with limited data releases scheduled before the September meeting, the market is fully pricing in a cut in September,” Saidel-Baker noted.
While it appears clear the cutting will start in September, she said, “the duration of the cutting cycle and the overall magnitude of cuts are likely to disappoint market participants who have been anxiously awaiting easing policy. The fundamental drivers of the next inflationary cycle are already firmly in place, suggesting that inflation will again rear its head in 2025, limiting the Fed’s ability to continue cutting rates.”
ITR expects between 25 and 100bps of cuts this cycle.
“Jackson Hole will provide the Fed and Chair Powell an opportunity to fine-tune messaging and influence market expectations in the run-up to the September FOMC meeting,” according to Andy Schneider, senior U.S. economist at BNP Paribas.
Powell is likely to signal the start of rate cuts, he said. “While we do not think Powell will rule out a 50bp cut in September, he is likely to downplay fears that the Fed is behind the curve or that the U.S. economy is rapidly deteriorating.”
BNP sees a cut in September, with another quarter-point cut by yearend. “Risks to this view are becoming more one-sided, however, and a more pronounced weakening of the labor market that might challenge the employment leg of the Fed’s mandate would warrant greater easing,” Schneider said.
The symposium allows “the Fed chair to frame the policy outlook within a broader historical context,” he added. “At the current juncture, we would not be surprised to see Powell reprise elements of the risk-management approach he laid out in 2018. Back then, officials were trying to balance the risk of hiking too quickly and cutting short the expansion versus hiking too slowly and overheating.”
Of course, in the current situation “the risks that need to be balanced are between cutting too quickly (and undermining progress on inflation) versus cutting too slowly (and hurting economic activity),” Schneider said.
Powell will likely “advocate a baseline of moving cautiously, which implicitly could be seen as pushing back against the notion of kick-starting the cycle with a 50bp cut,” he added.
BNP’s base case “remains for a still-solid labor market to underpin a 25bp cut in September and a cumulative 50bp of cuts this year. If data evolve differently, so will our base case,” Schneider said.
The highlight of Powell’s address, he said, “will be the acknowledgement that progress on inflation has been sufficient to allow the start of rate cuts. That progress has been both quantitative and qualitative.”
“It will be interesting to see when the Fed will shift focus to the jobs market versus inflation, and possibly Fed Chairman Powell will allude to this in Friday’s broadcast,” said Jeff O’Connor, head of equity market structure for the Americas at Liquidnet, “but incremental data points from both components continue to support, at a minimum, a 25bps rate cut in September.”
While jobs data have “been quite benign,” suggesting the labor market is cooling, he said, it is “not going to fall off a cliff.”
With the question for the next meeting how much, not if, O’Connor said, “Powell could go a long way towards setting those expectations … Which may be asking too much.”
The symposium, and Powell, “may provide a small window into how they see the easing phase may play out and the changing effectiveness of monetary policy at different phases of the monetary cycle,” noted Satyam Panday, chief U.S. and Canada economist at S&P Global Ratings.
S&P “penciled in a 25-basis-point rate cut in September,” to be followed by one more this year and 100 bps “spaced out” next year. “That will help the Fed engineer a soft landing — where demand stays close to potential while the last bit of excess inflation evaporates,” Panday said.