Fed Chair Powell: “The Time Has Come for Policy to Adjust”
Those words emanating from the bucolic setting of Jackson Hole reverberated throughout the financial world as equity and bond markets rallied accordingly. The siren song of “cheaper money” rarely fails to inspire investors. When is this “adjustment”? “The direction…is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” He is pointing to a rate cut at the next meeting (Sept 18) but needs to regularly invoke the Fed’s “data dependent” mantra. Wednesday’s release of the Fed minutes from the July 30-31 meeting also served to telegraph the change: “We observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting,” the summary stated. Futures markets now predict a 37% chance of a 50 bp cut at the Sept 18 meeting and a 100% chance of at least a 25 bp cut. The futures market is indicating 1.00% to 1.25% of total cuts this year (in 3 meetings).
The annual Jackson Hole Fed speech usually covers long term progress and forecasts. Powell summed up the inflation battle, even taking a victory lap: “Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic,” (Significant that he said “before the pandemic” implying the inflation battle is “won”). He followed that with: “And the balance of the risks to our two mandates has changed.” Employment is focus now. On that note, the Fed’s minutes included a note that “reported payroll gains might be overstated.” That was at the July 31 meeting. Two days later worldwide stock markets cratered as the US reported lower than expected jobs creation. Then this week, the BLS revised non-farm payroll growth downward by 818,000 – the biggest revision since 2009. Markets barely moved as the revision was “expected.” For the past 3 years the Fed has bemoaned the “tightness” in the labor market contributing to stubborn inflation. Now the long awaited “slack” has returned. Interestingly, the jobs market seems to now behave in reaction to pandemic era job tightness. Right now, hiring has slowed (less job creation) as consumer demand cools. But employers remember how hard it was to find workers in recent years; so, they are reluctant to lay off workers (perhaps less “trigger happy” than during previous cycles). The Fed fears that a “tipping point” may occur (or already has occurred) pushing the economy into a recession with unemployment accelerating. That would be a “behind the curve” scenario that could see the Fed playing catch up with a deteriorating economy and jobs market. This could dictate whether the rate cut cycle will be gradual or steep. Powell and team will have another round of PCE, CPI and Employment reports to chew on before September 17. Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.