TLDR:
- The Federal Reserve is expected to cut interest rates in September
- Recent jobs data and Fed meeting minutes support this expectation
- Markets are pricing in multiple rate cuts through 2025
- Fed Chair Jerome Powell will speak at Jackson Hole on Friday
- The speech is likely to confirm rate cut plans without providing specifics
The Federal Reserve appears set to begin cutting interest rates in September, marking a significant shift in monetary policy after over a year of rate hikes and holds. This expectation has been reinforced by recent economic data and statements from Fed officials.
On Wednesday, minutes from the July Fed meeting revealed that a “vast majority” of members favored a rate cut in September, barring any surprises.
This was further underscored by Philadelphia Fed President Patrick Harker, who told CNBC on Thursday that “in September we need to start a process of moving rates down.”
The market has largely priced in this move, with traders seeing a 75% chance of a 25 basis point cut at the September 17-18 meeting, according to CME Group data. By the end of 2024, markets are forecasting a total of 100 basis points in cuts.
Recent economic data has supported the case for easing monetary policy. A significant downward revision to jobs numbers, the largest since 2009, suggests the labor market has been weaker than previously thought. This, combined with cooling inflation, has put pressure on the Fed to loosen its stance.
Fed Chair Jerome Powell is set to deliver a keynote speech at the annual Jackson Hole economic symposium on Friday at 10 a.m. ET.
While the speech is highly anticipated, it is unlikely to contain any startling revelations. Instead, Powell is expected to provide a broad overview of the economic situation and offer limited guidance on future policy moves.
Analysts anticipate Powell’s tone to lean dovish, acknowledging the progress made in the inflation fight while also noting some economic headwinds. He may also address the softening labor market and the potential risks associated with it.
The Fed’s key overnight borrowing rate has remained unchanged for the past 13 months following a series of aggressive hikes. The central bank’s ability to bring inflation down from 9% to less than 3% without causing a significant economic slowdown has been noteworthy.
However, some economists argue that the Fed is now behind the curve and needs to act quickly. UBS economist Paul Donovan stated,
“The Fed is late, and is now going to have to scramble after the decline in inflation, in an undignified manner.”
The timing and magnitude of rate cuts remain subject to incoming economic data. While a 25 basis point cut in September seems likely, there’s still a small chance of a larger 50 basis point reduction if economic conditions deteriorate further.
Powell’s speech may also touch on broader themes, such as lessons learned from the recent inflationary period and how the Fed views its dual mandate of price stability and maximum employment in the current economic landscape.
As the Fed prepares to transition from a tightening cycle to an easing one, market participants will be listening closely to Powell’s words for any clues about the path ahead. However, given the Fed’s data-dependent approach, specific details about the timing and size of future rate cuts are unlikely to be provided.
The Jackson Hole symposium, which runs through Saturday, brings together central bankers from around the world to discuss economic policy.
This year’s theme is “Reassessing the Effectiveness and Transmission of Monetary Policy,” providing a fitting backdrop for discussions about the Fed’s next moves in its ongoing efforts to manage inflation and support economic growth.
