Rate Cut “On The Table”, Treasuries Rally, “Contrarian” News Cycle Changing?
Last week marked 1 year since the last move in the Fed Funds rate. Yes, it’s been sitting at 5.25-5.50% since July 26, 2023. That compares with other “peaks” of 8 months (2000/2001), 18 months (2006/2007), and 10 months (2018/2019). With inflation nearly at the Fed’s 2% target and a weakening jobs market, it’s time. Or “almost time.”
At yesterday’s meeting, the Fed held rates steady (as expected) and included positive hints in the statement: “In recent months, there has been further progress toward the Committee’s 2% inflation objective.” Then Powell put the hammer down at his presser: “A reduction in our policy rate could be on the table for as soon as the next meeting in September.” That’s Fed speak for, “let’s get ready to rumble!!” The 10-year Treasury dropped 10 bps during Powell’s comments. The Dow rallied over 600 points. Powell again stressed the dual mandate, and that inflation is tame enough for policymakers to give “equal weight” to the labor market. As far as a potential downturn in the labor market: “We’re watching really carefully for that…I would call it a statistical thing that has happened throughout history…downside risks are real now.” The Fed is obviously concerned and wary about waiting too long to cut rates and miss the “soft landing.” Hiring has declined and unemployment claims show more unemployment and longer periods of jobseekers unable to find a job. What hasn’t happened (yet) is mass layoffs and the Fed is obviously hoping to be acting in time to avoid that. There is a sense of urgency to the September rate cut. Futures markets indicate a 100% probability of a September cut, with a 32% probability of a 50 bp cut.
Today’s data indicated more weakening in the labor market (249,000 initial jobless claims for the week, up from 235,000 the week before, highest since Aug 2023) and unexpected contraction in US manufacturing in July (ISM at 46.8, the lowest since Nov 2023). This info definitely reinforced the Fed’s determination for cutting and also rattled equity markets. The recent “bond market contrarian news cycle” of bad economic news equals good rate news didn’t apply. Recession fears are taking hold as Goldilocks’ porridge may be getting cold. One analyst remarked, “The stock market doesn’t know whether to laugh or cry.” Tomorrow’s jobs report will definitely be closely watched (and parsed for potential statistical errors in methodology). Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.
The Zen of Fed Speak – Powell struck a philosophical tone in his description of the criteria for lowering rates. “The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market.” He often emphasizes that policymakers are not focused on a single data point or trend. The “totality” concept has roots in Zen meditation. The practice allows the meditator to “withdraw from focus on a particular object and instead be aware of “all phenomena as a unified totality.” I could imagine Powell meditating on this at the upcoming Jackson Hole Economic Symposium about to deliver his annual remarks…