Fed Chairman Jerome Powell is likely lay out the case for rate cuts starting September when he takes to the stage at the annual central bank symposium in Jackson Hole, Wy., slated for next week but the Fed chief is expected to stress that cuts would be “orderly,” downplaying the prospect of a 50 basis point cut next month.
“We expect Chair Powell will lay out a case for an orderly withdrawal of monetary policy restrictiveness in a speech at Jackson Hole the morning of Friday, August 23, and by orderly, we mean 25 bp rate cuts, rather than 50 bp,” economists’ at UBS said in a recent after updating their rate cut call.
“We expect three 25 bp rate cuts this year, one at each of the September, November and December FOMC meetings,” they added, expecting that the Fed’s September meeting will reflect consensus among voting members that fed policy was now restrictive amid slowing growth.
Powell is expected “to make the case to take out a little more restrictiveness in the next few meetings than previously signaled, to better position policy, something of a recalibration,” UBS said, but remain data dependent.
But the Fed chief is unlikely to signal that rate cuts will be ongoing as he is expected to “remain data dependent and caution that ongoing rate cuts after any recalibration should depend upon ongoing progress on inflation toward 2%, weighed against the risks to the labor market expansion,” the economists said.
Many on Wall Street have called for aggressive cuts in the wake of the weaker July nonfarm payrolls report that triggered the Sahm Rule — a measure suggesting a recession is underway when the three-month average U.S. unemployment rate rises by 0.50% or more from its 12-month low — but against the backdrop of slowing but real GDP growth … “would not seem that ominous,” they added.
Others agree, with Morgan Stanley downplaying the recession signal from the rise in unemployment rate isn’t as worry as in previous cycles because labor demand is holding up relatively well.
“The recessionary signal from the unemployment rate should come primarily from the fall in labor demand, and so the current rise in the unemployment rate, though seemingly as large as the beginning of other downturns, is actually only about half the signal as in the past,” Morgan Stanley added.
While the Fed may pause rate cuts to reassess, UBS says it is “comfortable” with its projection that headline PCE inflation touches 2.0% and core 2.1% in the second quarter of next year, encouraging the Fed to continue with rate cuts next year.
“While successive three 25 bp rate cuts this year would reposition policy more in line with a policy rule, the FOMC may want to just keep going in 2025 since our forecast expects further slowing from here, if not recession,” it added.
