U.S. Federal Reserve Chairman Jerome Powell holds a news conference after the Federal Open Market Committee’s two-day interest rate policy meeting in Washington, U.S., July 31, 2024.
Kevin Mohatt | Reuters
Despite the attention paid to Federal Reserve Chairman Jerome Powell’s policy speech on Friday, the chances of it containing any surprising news appear slim.
After all, the market has made up its mind: The Fed is going to start cutting interest rates in September — and will likely continue cutting through the end of the year and into 2025.
While some questions remain about the size and frequency of the cuts, Powell is now left to deliver a brief review of where things have been and provide some limited guidance on what’s ahead.
“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 brokerage where he’s worked for more than 40 years. He expects Powell to be “directionally clear, but details of how quickly and exactly when will depend on the data between now and the meeting. No doubt they will start to be cut in September.”
The speech will be delivered at 10 am. ET from the Fed’s annual meeting of the world’s central banks in Jackson Hole, Wyoming. The conference is entitled “Reassessing the effectiveness and transmission of monetary policy” and runs until Saturday.
If there were any doubts about the Fed’s intentions to cut rates by at least a quarter of a percentage point at its Sept. 17-18 open market committee meeting, they were put into effect on Wednesday. Minutes from the July meeting showed an “overwhelming majority” of members were in favor of a cut in September, ruling out any surprises.
Philadelphia Fed President Patrick Harker drove the point home even further on Thursday when he told CNBC that “in September we have to start a rate-cutting process.”
Guidance topic
A key question is whether the first cut in more than four years is a quarter or a half unit, a matter on which Harker would not commit. Markets are betting on a quarter, but leave open a 1-in-4 chance for a half, according to CME Group. FedWatch.
A half-unit move would likely require a significant deterioration in economic data between now and then, specifically another weak nonfarm payrolls report in two weeks.
“While I think the Fed’s base case is that they’re going to move by a quarter, and my base case is that they’re going to move by a quarter, I don’t think they’re going to feel the need to provide any guidance around that,” Crandall said.
In previous years, Powell has used the Jackson Hole speech to outline broad policy initiatives and provide clues about the future of policy.
In his first appearance in 2018, he laid out his views on interest rates and unemployment rates considered “neutral” or stable. A year later, he said rate cuts were coming. In a speech delivered amid racial protests in 2020, Powell laid out a new approach that would allow inflation to be hotter than usual without raising interest rates in the interest of promoting an inclusive labor market. This “flexible targeting of average inflation”, however, will be preceded by a period of rising prices – leaving Powell to navigate a sensitive policy minefield over the next three years.
This time, the aim will be to confirm market expectations while also indicating his impressions of the economy and in particular the easing of inflationary pressures and some concerns about the labor market.
“For us, the key will be President Powell’s tone, which we expect to lean downward,” or toward lower interest rates, Jack Janasiewicz, chief portfolio strategist at Natixis Investment Managers Solutions, said in a written comment. “Simply put, inflation continues to trend towards the 2% target, seemingly at a pace that exceeds consensus. 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 Fed has held its key overnight lending rate steady for the past 13 months after a series of aggressive hikes. Markets have done well under the higher interest rate regime but rose briefly after the July session on signs of a worsening jobs picture and weakening manufacturing.
Powell is expected to give at least a nod to some economic headwinds, as well as the progress the Fed has made in its fight against inflation.
“We expect Powell to express a little more confidence in the outlook for inflation and place a little more emphasis on downside risks in the labor market than he did in his press conference after the July FOMC meeting in light of the data released ever since,” Goldman said. Sachs economist David Mericle said in a recent note.
Goldman is on consensus market expectations: rate cuts at each of the next three meetings, followed by more easing in 2024 that will ultimately cut about 2 percentage points from the Fed Funds rate — a policy path that will run out, very broadly terms, Powell’s at Jackson Hole.
Fed chairmen claim to be insensitive to financial market moves, but Powell no doubt saw the reaction after the July meeting and will want to allay fears that the central bank will continue to wait before easing.
“Powell tends to support the stock market,” said Komal Sr-Kumar, head of Sri-Kumar Global Strategies. “Many times, he has indicated that interest rates will come down. They haven’t, but this time, he will.”
