Federal Reserve chair Jerome Powell has signalled that “the time has come” for monetary policy easing as the Fed’s focus shifts to the labour market side of its dual mandate.
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” Powell told attendees at the Jackson Hole Symposium hosted by the Federal Reserve Bank of Kansas City over the weekend.
“We do not seek or welcome further cooling in labour market conditions.
“Overall, the economy continues to grow at a solid pace. But the inflation and labour market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased … we are attentive to the risks to both sides of our dual mandate.”
Seema Shah, chief global strategist at Principal Asset Management, observed that markets reacted with “delight” to Powell’s speech, and are now pricing in 100 basis points (bps) of rate cuts by year-end, potentially equivalent to 50 bps in September and 25 bps cuts in both November and December.
“Powell emphasised that they will not tolerate any further weakening in labour market conditions,” Shah said.
“If the August jobs report confirms July’s weakness, the Fed will respond with a 50 bps cut. This is consistent with our own policy projection – we expect the Fed to deliver a 25 bps cut in September but, if the August jobs report is weak, a 50 bps cut will become our baseline.
“If the jobs data comes in stronger and the Fed responds with a 25 bps cut in September, it is possible that the market will react with disappointment, despite the more reassuring labour market backdrop,” Shah said.
Overall, the key takeaway from the speech should be one of relief, she underscored.
“With the Fed alert to labour market risks and ready to start cutting rates, recession risk should start abating.”
Meanwhile, T. Rowe Price chief US economist Blerina Uruçi expects the Fed to initiate a 25 bps cut in September and a 25 bps cut per meeting until the end of the year.
However, Uruçi echoed Shah’s and Powell’s emphasis on data dependency, noting that weaker labour market data could still prompt a 50 bps cut next month.
“That would include further rises in the unemployment rate or payroll growth below 100,000. I have the payroll growth higher than I would normally expect because given government/healthcare/education have been driving job growth, 100,000 would imply job losses in other rate-sensitive sectors of the economy,” she said.
“If the economy evolves as I expect, a 50 bp cut will not be needed this year, and the total number of cuts in the next 12 months will be in the range of 100 bp–125 bp, versus market pricing of 200 bp worth of cuts.”
