After greater than a 12 months of pleas from Wall Street, Federal Reserve Chairman Jerome Powell has finally hinted that he’ll start cutting rates of interest. In a much-anticipated keynote speech at an annual symposium in Jackson Hole, Wyoming, on Friday, Powell said his confidence that inflation would return to the Fed’s 2% goal had grown and there was now not any reason to maintain rates high to fight it.
“It is time to adjust policy,” he said, noting that “upside risks to inflation have diminished and downside risks to employment have increased.”
Powell’s comments come after inflation fell to a three-year low of two.9 percent in July and the unemployment rate rose to 4.3 percent, triggering a key recession indicator called the Sahm rule.
After greater than two years of focusing totally on the value stability of its dual mandate, Powell stressed that the Fed is now more aware of the rising risks to the labor market. “We do not seek or welcome a further slowdown in labor market conditions,” he said.
Looking ahead, Powell said the timing and pace of future rate cuts would depend upon upcoming data, but noted that “the direction is clear.”
“We will do everything in our power to support the strong labor market while making further progress toward price stability with an appropriate withdrawal of policy restraint,” he said, adding: “There are good reasons to believe that the economy will return to an inflation rate of 2 percent while the labor market remains strong.”
Stephen Brown, deputy chief North American economist at Capital Economics, said the “unmistakably dovish” tone of Powell’s speech on Friday was an indication that a larger-than-expected 50 basis point rate cut in September was now possible – at the least if the unemployment rate continues to rise in August.
However, Brown argued that the rise within the unemployment rate in July was likely on account of “transitory factors,” so unless the August jobs report is dismal, a 25 basis point rate cut next month is the almost definitely final result.
Are investors too optimistic?
Glen Smith, chief investment officer at GDS Wealth Management, also argued that a 25 basis point rate cut in September is now all but guaranteed. He said that after Powell’s speech, it looks just like the long-awaited and sometimes dismissed economic “soft landing” is finally here, because the Fed steps in to support the economy. But how much support the Fed intends to offer remains to be in query.
“While a September rate cut is essentially a done deal at this point, the more important question is whether this will be a one-off rate cut or whether this will be the start of a broader cycle of cuts. That will be determined by economic data over the next two to three months,” Smith said. Assets by email.
As for future monetary easing beyond next month, Smith warned that markets could also be getting too excited. “We remind investors that the market has been too optimistic about rate cuts in the past,” he said.
Brian Coulton, chief economist at Fitch Ratings, shared this view. “There does not appear to be serious concern about the risk of an impending recession and a wave of job losses – the kind of concern that might justify rapid rate cuts. Rather, it is about the diminishing risk of increased wage growth keeping inflation too high,” he said. Assets by email. “The easing of monetary policy after September will be gradual.”
Bond traders’ September rate expectations modified little after Powell’s press conference. The bond market had already priced in a one hundred pc probability of a rate cut next month, including a 32.5 percent likelihood of an excessive rate cut of fifty basis points, in line with CME Group. FedWatch Tooland that remained the case even after Powell’s speech.
However, the stock market reacted positively to Powell’s dovish tone on Friday. The Dow Jones Industrial Average rose 0.79 percent by 11 a.m. ET, while the S&P 500 and the tech-heavy Nasdaq gained 0.77 percent and 0.96 percent, respectively.
Consumers, however, is not going to profit immediately from Powell’s upcoming rate cut. Ted Rossman, senior industry analyst at Bankrate, joined others in stating that the Fed will cut rates steadily, meaning it can take a while for borrowing costs for consumers to largely fall.
“We’ve already seen a significant decline in mortgage rates. The average 30-year fixed-rate mortgage rate has fallen from about 8% last October to 6.62% today. But that’s still high compared to the last two decades,” he said, adding, “We haven’t yet seen a significant decline in credit card or auto loan rates.”
