Economists say that Fed Chairman Powell will lay the groundwork for a rate cut in September at next week's Jackson Hole Symposium, and the actual cut will depend on the August employment data, which will be released a week later and is most closely watched.
Krishna Guha, Evercore ISI's Vice Chairman, said in a note to clients that Powell will set the tone for future monetary easing policies and tend to be 'proactive' rather than 'passive' on the rate cut issue. Specific details will have to wait until the Fed's release of August employment data on September 6th to be determined.
Guha said: 'The Fed is now prioritizing employment data over inflation data, and the forthcoming employment data will determine how the Fed pushes for a rate cut actively.'
It is widely expected that Powell will continue the tradition of Fed chairman and provide clues about monetary policy at the opening ceremony of the Fed's Jackson Hole meeting next Friday.
The US stock market has recovered a large part of its losses since the sharp drop in August and continues to rise steadily this year.
Despite the panic at the beginning of August, which was partly due to disappointing job reports in July and the sharp unwinding of popular yen carry trades, stock investors seem to be optimistic about the prospect of continued economic growth.
In contrast, the federal funds rate futures market has priced in a series of large rate cuts, meaning that people are concerned that the Fed will need to take aggressive action to deal with the sharp weakness in the economy.
Scott Helfstein, Chief Investment Strategist at Global X, said in a report, 'Overall, CPI has fallen below 3% for the first time since March 2021. Chairman Powell should celebrate this at Jackson Hole and try to convince the market to cut rates by 25 basis points in September. The current pricing of the rate market is nearly 50 basis points in September, but the Fed is unlikely to achieve this.'
After the CPI data was released on Wednesday, rate futures traders did give up their bets on a 50 basis point rate cut in September. According to CME's FedWatch tool, they now believe that the probability of a large rate cut is about 43%, down from about 53% on Tuesday and 69% a week ago. Traders believe the probability of a 25 basis point rate cut is 57%.
Two former Fed officials said on Wednesday that the Fed may lower the federal funds rate by 25 basis points at its September meeting, based on what they currently know.
Former Kansas City Fed President George said, 'I don't think there will be a larger rate cut in September.' She said that although the July CPI report was good, it 'still shows high inflation'. Overall, the economy still looks resilient, providing time for policy adjustments.
Former Fed Vice Chairman Blinder agreed, saying his basic judgment is that unless the August employment report looks 'terrible,' the Fed will cut rates by 25 basis points in September.
Blinder said that if the economy deteriorates between now and the Fed's next policy meeting in September, policymakers will take greater rate cuts. But he added that he and the Fed did not have such expectations.
Just 12 days ago, when the US Labor Department released a weaker-than-expected July job report, the market began pricing in a 50 basis point rate cut by the Fed in September, and even the expectation of an emergency rate cut during the meeting surged. Traders were concerned that a surge in the unemployment rate would increase the risk of an economic recession.
But since then, the comments of Fed officials have shown that they are more optimistic about the economic outlook.
July's CPI data released on Wednesday is seen by most economists as good enough to stimulate a rate cut by the Fed in September, while the size of the cut will depend on the employment data. Guha outlined in his report how he believes the Fed will respond to August employment data.
If the August job report is better than last month (which is Guha's basic expectation), the Fed will cut rates by 25 basis points at each of the three remaining meetings this year, and 'as needed' cut rates by 25 basis points in the first quarter of next year.
If August employment data continues to show this new trend of weakness, the Fed is likely to cut rates by 50 basis point in September and November.
If the data shows that the job market is collapsing, the Fed will cut rates by 200-250 basis points before December.
He concluded that the Fed only needs a very reliable report this year to design a 25 basis point rate cut plan twice.
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