Powell poised to signal rate cut amid economic uncertainty

Jerome Powell, the Chair of the US Federal Reserve, is set to deliver a pivotal speech on Friday at the Fed’s annual gathering in Jackson Hole, Wyoming, according to BNN Bloomberg.  

This address is anticipated to set the stage for a potential interest rate cut while reassuring investors that the Federal Reserve can manage economic challenges without triggering a sharp slowdown. 

The speech occurs at a critical juncture for both the US central bank and the US$27tn Treasury market. Powell and his colleagues are poised to lower borrowing costs just weeks before the upcoming presidential election, a move that will subject them to intense public scrutiny.  

This action also coincides with a growing focus on the cooling labour market after a prolonged period of prioritizing inflation control. 

Joseph Brusuelas, chief economist at RSM US LLP, highlighted the importance of Powell’s upcoming statement, noting the market’s anxiety over the possibility of a policy error.  

Investors are particularly eager to discern the Fed’s stance on a potential policy shift. Market volatility spiked earlier this month, with the S&P 500 Index dropping more than six percent in three days, partly driven by July’s labour-market data.  

This turmoil led to predictions of a significant rate cut in September, with some traders anticipating a 50-basis point reduction. 

The Federal Reserve, under Powell’s leadership, has previously encountered challenges, particularly in responding to inflation during the pandemic.  

Despite successfully guiding inflation back toward the two percent target, there is concern that the Fed may now face difficulties in addressing employment issues as inflationary pressures subside. 

Recent data indicates cracks in the labour market, with US employers slowing their hiring pace and the unemployment rate rising for the fourth consecutive month. These developments have raised concerns that high interest rates may be pushing the labour market closer to a tipping point.  

Some economists also anticipate a significant downward revision in employment data for the year through March. 

As Powell prepares to speak, a central question is whether further weak jobs data could lead to a larger-than-expected rate cut next month or prompt a more aggressive approach to rate reductions in the coming months.  

Matthew Luzzetti, chief US economist at Deutsche Bank, suggests that the argument for a more substantial rate cut could gain traction if the labour market shows further signs of weakening. 

A year ago, Powell’s Jackson Hole speech painted a different picture, with the Fed appearing committed to raising rates further as inflation remained high and the labour market tight.  

However, since then, inflation has moderated, with a key measure of underlying price pressures cooling for the fourth consecutive month in July. 

Pooja Sriram, an economist at Barclays, expects Powell to acknowledge that conditions may soon warrant a policy adjustment, though it remains unclear if he will specify a timeline for potential rate cuts.  

Powell’s message will need to strike a delicate balance, addressing political pressures in this election year while avoiding overly negative signals about the economic outlook. 

Recent market developments have led bond traders to scale back their expectations for rate cuts, now anticipating a quarter-point reduction next month and a total of 75 to 100 basis points in cuts by year’s end.  

Powell has emphasized that policy decisions will be driven by the “totality” of incoming data, with one more job report and two inflation releases scheduled before the Federal Open Market Committee’s next meeting in September. 

Lindsay Rosner, head of multi-sector fixed income at Goldman Sachs Asset Management, notes that without this additional data, Powell is unlikely to commit to a specific rate cut in his Jackson Hole remarks, opting instead to maintain flexibility in response to evolving economic conditions. 

The theme of this year’s symposium, ‘Reassessing the Effectiveness and Transmission of Monetary Policy,’ is particularly relevant as investors and economists question the pace and endpoint of rate cuts in the coming months.  

The complexities of the post-pandemic economy have added uncertainty, with some Fed officials suggesting that the neutral rate may have shifted higher, further complicating the assessment of how restrictive current policy is. 

Rosner-Warburton from MacroPolicy Perspectives anticipates that Powell will emphasize this uncertainty, stressing the importance of data in guiding future decisions on the pace and extent of rate cuts.