Chair Powell Cements September Fed Cut

by | Aug 26, 2024 | Economic Perspectives

It was an unusually light data week in the US, dominated by Chair Powell’s speech at the Jackson Hole symposium. It was a speech we could have written ourselves. Arguably, we have…not the words themselves, of course, but definitely the sentiments and views expressed thereby.

Specifically, Chair Powell noted that:

“All told, labor market conditions are now less tight than just before the pandemic in 2019—a year when inflation ran below 2 percent. It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon.” Check: we have long highlighted the moderation in nominal wages and the dramatic slowdown in until labor costs, which stood at just 0.5% y/y in Q2.
“The upside risks to inflation have diminished. And the downside risks to employment have increased. As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate.” Check: since early this year, we talked about 2024 being the year when the dual mandate returns; as early as April, we made the case that the labor market will become more important as a policy driver than inflation during the second half of the year.

“The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.” Check: we had long argued that the Fed has ample room to calibrate the policy rate lower without fear of reigniting inflation. Admittedly, late last year we called for 150 basis points worth of cuts in 2024. By June, we stood almost entirely alone in still forecasting three rate cuts after the June SEP only showed one. With three meetings left, current market pricing for 100 bp of 2024 cuts is reasonable. We expect a 25 bp cut in September; 50 would require a really bad August labor report.

“The limits of our knowledge—so clearly evident during the pandemic—demand humility and a questioning spirit focused on learning lessons from the past and applying them flexibly to our current challenges.” We certainly strive to maintain such humility and questioning spirit in our daily work. Sometimes we jokingly refer to “common-sense economics” as our preferred approach. At times, that means you have to recognize when the tools (i.e., models) of the past do not apply to the current situation. It was why we were so upbeat on the economy back in 2021 and dared to forecast disinflation without a recession in 2023. That same common sense makes us worried about the US fiscal picture…but that’s a discussion for another time.

Data this week showed a holding pattern for unemployment claims and an unmistakable untick in home sales. The latter is a clear reflection of the 50-basis point decline in the 30-year mortgage rate since the start of July as Fed cuts began being priced back into the market. New home sales surged 10.6% m/m in July, the largest monthly gain since August 2022 and the highest level (admittedly, by a very small margin) since May 2023. Existing home sales inched up 1.3% m/m.