Federal Reserve Chairman Powell held a press conference after holding a two-day interest rate policy meeting in Washington, the United States, on July 31, 2024.
Kevin Mohart | Reuters
While all attention will be on Federal Reserve Chairman Jerome Powell’s policy speech on Friday, the chances of it containing any shocking news appear slim.
After all, the market has made up its mind: the Federal Reserve will start cutting interest rates in September and may continue to do so until the end of this year and into 2025.
While some questions remain about the magnitude and frequency of cuts, Powell can now only briefly review the past and provide some limited guidance on what lies ahead.
“Stop me if you’ve heard this before: They still rely on data,” said Lou Crandall, a former Fed official who is now chief economist at Wrightson-ICAP. The company has been with us for over 40 years. He expected Powell to be “clear in direction, but how quickly and when exactly will depend on the data between now and the meeting. There’s no doubt they’ll start cutting back in September.”
The speech will be delivered at 10 a.m. ET at the Federal Reserve’s annual meeting of global central bankers in Jackson Hole, Wyoming. The meeting is titled “Reassessing the Effectiveness and Transmission of Monetary Policy” and will last until Saturday.
If there were any doubts about the Fed’s intention to deliver at least a quarter-percentage point rate cut at its Sept. 17-18 Open Market Committee meeting, those were put to rest on Wednesday. Minutes of the July meeting showed that barring any surprises, an “overwhelming majority” of members supported a rate cut in September.
On Thursday, Philadelphia Fed President Patrick Harker further elaborated on this point, telling CNBC that “we need to start the process of lowering interest rates in September.”
a guiding question
One major question is whether the first decline in more than four years will be a quarter of a percentage point or a half-percentage point, a topic Harker was reluctant to discuss. The market is betting on a quarter, but there’s still a one-in-four chance of betting on a quarter, according to CME Group. Fed Watch.
A half-percentage change would likely require a significant deterioration in economic data between now and then, especially with another weak non-farm payrolls report in two weeks.
“While I think the Fed’s base case is that they’re going to raise rates for a quarter, and my base case is that they’re going to raise rates for a quarter, I don’t think they’re going to feel the need to provide any guidance on that,” Crandall said. explain.
In previous years, Powell has used Jackson Hole speeches to outline broad policy initiatives and provide clues about the future of policy.
In his first appearance in 2018, he outlined his views on “neutral” or stable interest rates and unemployment. A year later, he said a rate cut was imminent. In a speech delivered during racial protests in 2020, Powell unveiled a new approach that would allow inflation to be higher than usual without raising interest rates to promote a more inclusive job market. However, this “flexible average inflation target” would precede a period of soaring prices, leaving Powell with a delicate policy minefield to navigate over the next three years.
This time, the task will be to confirm market expectations while expressing his impressions of the economy, particularly the easing of inflationary pressures and some concerns about the labor market.
“The key for us will be Chairman Powell’s tone, which we expect will tilt toward dovishness” or toward lower interest rates, Jack Janasiewicz, chief portfolio strategist at Natixis Investment Managers Solutions, said in written comments. “In short, inflation continues to move towards the 2% target at a pace that appears to be exceeding consensus. Combine this with signs that the labor market is softening and one feels there is no need to remain hawkish.”
Listen to the market
The Fed has kept its key overnight borrowing rate unchanged for the past 13 months after a series of aggressive rate hikes. Markets mostly performed well under the high interest rate regime, but There was a brief revolt after the July meeting amid worsening labor conditions and signs of weakness in manufacturing.
Powell is expected to at least acknowledge some economic headwinds and the Fed’s progress in fighting inflation.
“Given the data released since then, we expect Powell to express more confidence in the outlook for inflation and emphasize downside risks to the labor market more than he did at the press conference after the July FOMC meeting,” Goldman Sachs said. Sachs said (Sachs) Economist David Mericle said in a recent report.
Goldman Sachs is on the verge of reaching the market consensus: a rate cut at each of the next three meetings, followed by more easing in 2024, ultimately cutting the federal funds rate by about 2 percentage points — a policy path that would end in 2024. Be prepared for the year.
The Fed chairman has claimed to be insensitive to financial market moves, but Powell has undoubtedly seen the reaction after the July meeting and wants to allay concerns that the Fed will continue to wait before starting to ease policy.
“Powell tends to be supportive of stocks,” said Komal Sr-Kumar, global head of strategy at Sri-Kumar. “He’s said time and time again that interest rates are going to come down. They haven’t come down, but this time, he’s going to do it.”
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