US Federal Reserve Chairman Jerome Powell holds a press conference following the Federal Open Market Committee’s two-day meeting on interest rate policy in Washington on July 31, 2024.
Kevin Mohat | Reuters
With the focus on Federal Reserve Chairman Jerome Powell’s policy speech on Friday, the chances of it containing any startling news are remote.
After all, the market has made up its mind: The Fed will begin cutting rates in September — and will continue to cut rates through the end of the year and into 2025.
While there are still some questions about the size and frequency of cuts, Powell is now left to provide a brief review of where things have been and some limited guidance on what’s to come.
“Stop me if you’ve heard this before: They’re still data-driven,” said Lou Crandall, a former Fed official and now chief economist at Wrightson-ICAP, a dealer-broker with more than 40 years of experience. He said Powell “will be vague on direction, but the details of how quickly and exactly will depend on the data between now and the meeting. No doubt they will start to taper off in September.”
The speech will be delivered at 10 a.m. ET from the Fed’s annual conference of global central bankers in Jackson Hole, Wyoming. The conference is titled “Re-evaluating the effectiveness and transmission of monetary policy” till Saturday.
Any doubts about the central bank’s intentions to legislate at least a quarter-percentage-point cut at its September 17-18 open market committee meeting were quelled on Wednesday. In the minutes of the July session, a “majority” of members showed support for the September cut, no surprise.
Philadelphia Fed President Patrick Harger told CNBC on Thursday that he “should begin the process of cutting rates in September.”
A question of guidance
Whether the first cut in more than four years is a quarter point or half a point is a key question, something Harker won’t do. Markets are betting on a quarter, but are open about a 1-in-4 chance of a half, according to CME Group. FedWatch.
A half-point move would require a significant decline in economic data between now and then, especially another weak nonfarm payrolls report in two weeks.
“While I think the Fed’s base case is that they’ll move a quarter, and my base case is they’ll move a quarter, I don’t think they’ll feel the need to give any guidance that far,” Crandall said.
In earlier years, Jackson Hole used the speech to outline broad policy initiatives and offer clues about the future of policy.
In his first appearance in 2018, he outlined his views on interest and unemployment rates that are considered “neutral” or stable. A year later, he hinted that a rate cut was coming. In a speech amid racial protests in 2020, Powell unveiled a new approach that would allow inflation to run higher than usual, without rate hikes, in the interest of promoting a more inclusive job market. That “flexible average inflation target,” however, would precede a period of rising prices — leaving Powell to lead a subtle policy minefield over the next three years.
This time, the task is to confirm market expectations, while at the same time addressing the economy and in particular moderating inflationary pressures and some concerns over the labor market.
“For us, the key will be Chair Powell’s tone, which we expect to lean toward lower rates,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions. Combine this with signs that the labor market is softening, and one gets the sense that there is no need to maintain a hawkish stance.”
Listening to the markets
The central bank has held its key overnight borrowing rate for the past 13 months following a series of aggressive hikes. Markets have mostly performed well under the high-rate regime After the July meeting, labor continued to agitate on signs of declines and weakening manufacturing.
Powell is expected to approve at least some economic intervention, as well as progress by the Fed in its fight against inflation.
“We expect Powell to express a bit more optimism on the inflation outlook and place a bit more emphasis on downside risks in the labor market than in his press conference after the July FOMC meeting, in light of later data releases,” Goldman Sachs economist David Mericle said in a recent note.
Goldman echoed the consensus of market expectations: rate cuts at each of the next three meetings, followed by further easing in 2024, which would ultimately shave about 2 percentage points off the Fed funds rate — an improvement over the policy path. The most common terms were written by Powell at Jackson Hole.
Fed leaders say they are not sensitive to financial market moves, but Powell saw the reaction after the July meeting and will want to allay fears that the Fed will wait before starting to ease.
“Powell has tended to support the market,” said Komal Sar-Kumar, head of Sri-Kumar Global Strategies. “Again, he’s indicated that rates will go down. They haven’t, but this time, he’s going to do it.”
