I=5
Holding rates high for too long could weaken economic activity, Powell says
In a testimony to the senate, Jerome Powell said keeping rates high for too long could threaten economic activity.
“Reducing policy restraint too late or too little could unduly weaken economic activity and employment," he said.
He reiterated that they need more good data before starting to cut interest rates.
“More good data would strengthen our confidence that inflation is moving sustainably toward 2%.”
I=8
Fed leaves interest rates unchanged, notes progress in inflation
From what I‘ve heard everyone expected Powell to clearly signal to cut in September and some ppl have been already been talking about 50bp.
According to first commentary the changes in statements did not clearly signal that.
Now everyone will be focused on Powells remarks in the press conference.
Edit: There is one sentence everyone on Bloomberg is talking about which is
the committee is attentive to the risks to both sides of its dual mandate.
This sentence is in the official statement you‘ve linked but not in the picture you‘ve posted. I think CNBC made a mistake on the picture but updated it by now.
Yes, I noticed that as well. I have updated the image accordingly.
Powell just said that there was a good discussion if rates should be already cut today and he signaled that rates should come down if data continues to be good and in line with recent trends.
He said that the inflation side of their mandate is still the slighter larger problem as of now but the risk on the labor market side are larger - indicating a potential shift of priorities for the Fed going forward.
This is interesting. I’ve been contemplating for weeks that the labor market could increasingly become a focal point, especially as inflation continues to moderate and unemployment rises.
The market is currently pricing in a very orderly rate-cutting cycle, expecting almost one cut per meeting until July 2025. However, in past cycles, the Fed has typically responded to spikes in unemployment with aggressive rate cuts, and Powell don’t seem willing to risk a significant deterioration.
On the other hand, if the labor market doesn’t deteriorate significantly, I’m skeptical that we will see rate cuts at the anticipated pace of one per meeting going forward.
I=6
Several participants saw case for a rate cut in July, Fed minutes shows
Fed minutes indicate that several fed officials saw a case for cutting rates by 25 basis points in July meeting but decided to wait for more data.
“Several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision,” the minutes read.
The minutes also indicate that majority of the participants see the need for a rate cut in the September meeting if the data continue to come in as expected and that most of them expect further disinflation in the coming months.
“The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”
“Almost all participants observed that the factors that had contributed to recent disinflation would likely continue to put downward pressure on inflation in coming months.”
Many officials also pointed out that the risks to the employment goal have increased, adding that reported payrolls gain maybe overstated.
“A majority of participants remarked that the risks to the employment goal had increased, and many participants noted that the risks to the inflation goal had decreased.”
" However, many participants noted that reported payroll gains might be overstated, and several assessed that payroll gains may be lower than those needed to keep the unemployment rate constant with a flat labor force participation rate."
Before tomorrow Powell’s Jackson Hole speech, the market remains uncertain about the likelihood of a 25 basis point rate cut in September, as a 50 basis point cut still holds a notable probability.
By the end of 2024, the market anticipates 100 basis points of cuta, with expectations rising to 200 basis points by mid-2025.
However, I believe that such aggressive cuts are only likely if we see a continued deterioration in the labor market, which is not necessarily bullish.
Without further weakening, it seems unlikely that the Fed will ease as much as the market currently expects.
The primary focus for tomorrow isn’t just whether the Fed will cut rates, but rather any indication Powell might provide regarding the scale of the first cut in September and the broader trajectory of the rate-cutting cycle
Powell has started to sound significantly dovish, it seems to me they are starting to get worried that labor market weakness could get out of control.
He did not signal any pace of rate cuts in September or going forward, but I got the feeling that if further tweaking happens they will respond with aggressive cuts.
More than inflation data, unemployment and payrolls data going forward seems critical for this.
The markets increased slightly the odds of a 50bps cut in September after the speech due to this.
These are some important notes I took:
Economic activity showed modest growth in only three Districts, with the majority (nine Districts) reporting flat or declining activity. This is an increase from the five Districts that reported stagnant or declining activity in the previous period.
Labor Markets
Apparently, it is not common to get reports about slowing activity in the beige book
@Magaly Implied interest rate expectations now show that a 50 bps cut in tomorrow’s meeting is more likely with a 67% probability.
In addition, the trajectory of implied rate cuts got significantly more dovish as it prices that interest rates could go back to 270-300 bps within one year.
Did you change your expectation for a 25 bps rate cut to 50 bps or do you maintain that 25 bps is more likely? How would you see the probabilities? What are your expectations on the trajectory of interest rate cuts?
What are the main factors that changed market expectations? Is it a significant downward job revisions and higher full-time unemployment?
I think in the future we should develop models that show our expectations for interest rates and update them as soon as our expectations change, similar to how Aron does it with his updates on company models.
Yes, I noticed the shift occurred between Friday and the weekend. Interestingly, this change happened without any significant news or any Fed speakers following the CPI release on Wednesday.
The culprit seems to have been a Wall Street Journal article by Nick Timiraos, which suggested or make a bigger case for the possibility of 50 bps cuts. This changed market expectations.
On Friday, I heard on Bloomberg News that Timiraos is regarded as a ‘Fed whisperer,’ often used to guide market expectations when they diverge from the Fed’s intended actions.
Also, Bill Dudley ( president of the Federal Reserve Bank of New York from 2009 to 2018) came out and said he thinks the FED will go with 50 bps
I expect the Fed will do 50. I believe Chair Powell favors an aggressive approach: In his speech at Jackson Hole last month, he pointedly observed that a further weakening of the labor market — which seems to be happening — would be “unwelcome.” Monetary policy is tight, when it should be neutral or even easy. And a bigger move now makes it easier for the Fed to align its projections with market expectations, rather than delivering an unpleasant surprise not warranted by the economic outlook.
Given this context, and considering that the Fed indeed avoids surprising the markets always, a 50 basis point hike seems like the safer assumption. However, my confidence in either direction is not high at this moment.
I always thought 50 bps was the right move due to the weakening in the labor market, but did not think before the FED was willing to do it because of inflation fears and to not send a wrong signal about growth and being late, but Powell did sounded pretty dovish on Jackson Hole.
As for long-term expectations, the aggressive market pricing only makes sense if there is a recession, (which is my expectation). However, the current slowdown is very slow to expect that much easing that soon (even 125bps cuts only in 2024) unless there is a shock that accelerates everything.
The problem I have with the market pricing is that the markets expect significant easing very soon, but at the same time expect relatively good GDP, and earnings at 10% in 2024 and 15% in 2025.
These expectations seem misaligned, in my view, and I don’t believe all three will materialize at the same time. If we do see that level of significant easing, it would likely indicate that the economy is in a much weaker position than anticipated
But either way, tomorrow is most likely going to be very volatile, because I don’t remember the market being this split on a decision for a long time (listening to Bloomberg yesterday, most guests were still expecting 25bps, same as CNBC small survey), so there will be a part of the market that will be surprised.
And, also because we get new FED projections, I expect the FED to show more cuts than previously (4.1 as of 2025), but less than what the market is pricing most likely.
*While I think a model for rates is needed too, a model for GDP, inflation and unemployment will need to happen first, since rates are a function of these."
Great insights. I agree with the order how the models should be developed.
More insights for tomorrow:
While the market is pricing 50 bps with a 66% probability, the majority of economists instead are expecting 25bps cuts:
118 economists
Since the WSJ article on Sept 12:
I am very unsure about what the FED will do, since the decision seems to be based beyond the current data. And for me, what they will signal for the path ahead is likely to have a greater impact than the specific rate cut tomorrow.
But, If the FED only does 25 bps, while the majority of the market still expects 50 bps, I think we could see significant market volatility tomorrow.
I=9
Fed lowers interest rate by 50 basis points to a range of 4.75%-5.00%
@Magaly
Yes, it played kind of expected, 50 bps cuts but the new projections showed fewer rate cuts than the markets were expecting.
I think the FED should have cut in July (is not like signs of labor market weakness were not present back then, they just chose to ignore it) to avoid making this big move, there were a lot of questions and skepticism about why if the economy is strong, they had to cut by 50 bps.
Powell just responded repeatedly, this is think a recalibration of the FED policy, and they seem to still be betting heavily on a soft landing. They projections show exactly this.
I don’t buy they are not concerned, I think they are just saying this to not send a warning signal, but the shift from the July meeting and June projections is significant, just after the labor market started to show more signs of weakness.
The new dot plot is showing a lot of dispersion of expectation, and the long-term rate continues to increase, but very slowly.
Some notes I took:
Powell sounded a bit hawkish today, he especially pointed out that recent revisions to GDP and GDI remove some downside risks in the economy
Some comments:
This is the current pricing for the market, it changed slightly after the speech, since another 50 bps in the November meeting had a much bigger probability before.
FOMC Minutes Show Fed Considerably More Divided Over Size Of Rate Cut
While there was only one dissent, the FOMC Minutes show “some” officials preferred a 25bps cut.
After last week’s labor market report, is most likely those participants who wanted a lower rate cut, will try to push lower rate cuts now.
Current rate expectations show fewer cuts expected than before.
Despite the resilience the economy has experienced since the growth scare in August the market is still expecting 2 more rate cuts in 2024, but they have reduced the amount expected to ~2/3 in 2025.
I currently think the market participants just have no clue about rates more than the next meeting, since expectations continue to change significantly with every economic data release.
Since my most likely scenario continues to be a gradual slowdown of the economy in the next few years, I think we could eventually end up with a range of 2-3% rates.
I=6
Fed cuts key interest rates by 25 basis points as expected
