Federal Reserve Chairman Jerome Powell and his colleagues face a very different dilemma than they did a year ago when they convene for their annual economic symposium in Jackson Hole, Wyoming, later this week.
Last August, the central bank’s main question was how long interest rates would have to stay at 20-year highs to keep inflation in check. Now, with new signs of cooling inflation and a slowing job market, the question is no longer whether the Fed will cut rates but by how much?
Investors will be closely watching Powell's speech at 10 p.m. Beijing time on Friday, when he will have a chance to provide clues about the Fed's future monetary policy path.
He made it clear at his July 31 press conference that a 25 basis point rate cut next month was a possibility, but he downplayed the likelihood of a bigger move, such as a 50 basis point cut.
“We think we are approaching a point where if we get the data we hope to get, then we could potentially lower the policy rate at our September meeting.”
Traditionally, Fed chairmen have used their Jackson Hole speeches to deliver important, long-term policy messages.
Former Federal Reserve Chairman Ben Bernanke made the argument in a 2010 speech that the Fed could boost economic growth by buying bonds, a tool also known as quantitative easing (QE).
Powell’s 2018 “Guided by the Stars” speech, in which he outlined his thinking about the natural real interest rate — the rate that neither stimulates nor suppresses growth — may be his most memorable speech as chairman.
In 2022, Powell, in a shorter speech than usual, pledged to do whatever it takes to get inflation back to the Fed's 2% target and warned that higher interest rates could bring pain and higher unemployment, sending markets tumbling.
“We will keep going until we are confident the job is done,” he said at the time.
Last August, Powell again firmly stated that the Fed is "ready to raise interest rates further" and pledged to reduce inflation no matter what.
“While inflation has come down from its peak — a welcome development — it remains too high,” he said last year.
However, his tone may be very different on Friday after more encouraging U.S. inflation data reinforced that the Fed is making progress.
Some Fed watchers expect Powell to refrain from giving specific forecasts for September and instead caution that the Fed will now be more focused on employment because the job market is weakening.
“He wants to be very transparent, but frankly I don’t think he knows yet,” said Luke Tilley, bond portfolio manager at Wilmington Trust. “You’re probably going to see them become more focused on making sure unemployment doesn’t go down any further.”
The Fed has a dual mandate of maintaining price stability and full employment. As unemployment rises, the latter becomes increasingly important and puts more pressure on the Fed to act. In July, the U.S. unemployment rate rose to 4.3%, the highest level since October 2021.
Tilley expects Powell to discuss the natural rate, also known as the "neutral rate," which helps the Fed understand how constrained its monetary policy actually is.
“The discussion about what is neutral and what is restrictive will provide an opportunity for the Fed to say, ‘Hey, we’re going to cut rates, but let’s be clear that we’re just taking the brakes off a little bit, not accelerating,’ ” Tilley said.
George, a former Kansas City Fed president who once hosted the Jackson Hole conference, said she expected Powell to do something similar to what he did in his 2018 "Starlight Speech."
“I expect he’ll pick up on that topic and then step back and broaden the lens,” George said. “What I want to hear in this speech is, what does Powell think the last four years have told us about inflation dynamics and the labor market?”
But George also acknowledged that everyone will be looking for clues in the speech about what the Fed will do in September. She said market expectations appear to be "more aggressive than the outlook for above-potential growth would suggest."
“I think the Fed will continue to take a gradual path, but even as they start to lower rates, they’re going to be watching very closely how inflation progresses,” George said.
Fed watchers may have to wait until after this week for more confirmation on what may happen in September, with particular importance being the August nonfarm payrolls report scheduled for release on Sept. 6.
Any surprises in the report could change the Fed’s mind. A weaker-than-expected July payrolls report sparked the worst stock market sell-off this year and prompted some Fed watchers to bet on an imminent 50 basis point rate cut.
But traders have been reducing those bets over the past week as new reports demonstrating the economy’s resilience have eased concerns that a sharp slowdown in the U.S. economy is imminent.
The odds that the Fed will cut rates by 25 basis points instead of 50 basis points at its Sept. 17-18 meeting are now close to 75%, compared with a 50-50 chance just a few weeks ago.
The article is forwarded from: Jinshi Data
