Federal Reserve Chair Jerome Powell is scheduled to speak at 10 AM on Friday at the Jackson Hole Symposium, where he is expected to hint at a widely anticipated rate cut at the September FOMC meeting. This follows last week’s core CPI data, which recorded a 0.165% month-over-month increase, marking the third consecutive reading at or below a 2% annualized rate.
However, the question is no longer whether the Fed will initiate a rate-cutting cycle, but rather how rapidly and significantly it will unfold, Citi economists said in a recent note.
"We continue to see economic risks as tilted toward a more significant weakening in labor markets and the broader economy and dovish Fed policy risk as underappreciated by markets,” they wrote.
Citi projects 50bp rate cuts in both September and November but expects Powell to avoid committing to specific policy decisions, reiterating that these are “data dependent.”
A key aspect of Powell’s speech will likely be how he addresses the shift in risks, with concerns about the labor market now taking precedence as inflationary pressures ease. At the July 31st FOMC meeting, even before the unemployment rate rose to 4.3% and core inflation remained subdued, Powell had begun to highlight that the balance of risks was moving away from price stability and towards employment.
The latest data, showing cooling inflation and a faster-than-expected softening of the labor market, provides Powell with two potential justifications for a more aggressive pace of rate cuts, Citi economists note.
First, he might argue that as inflation decreases, the real policy rate – the nominal rate adjusted for inflation – effectively rises, necessitating a reduction in nominal rates to avoid overly restrictive monetary conditions.
Second, Powell could cite the more rapid loosening of the labor market as a reason to bring policy rates back towards neutral more quickly. Despite stronger-than-expected retail sales and a decline in initial jobless claims, Powell is likely to maintain his view that the U.S. economy will avoid a recession.
However, as the Citi economists point out, "with the 'Sahm rule' all but triggered, Powell’s intuition from July that downside risk to the employment mandate predominate should now be even stronger."
They believe Powell may use his Jackson Hole speech to reinforce the idea that policy is “well positioned” to respond to evolving data, possibly signaling that there is considerable scope to lower rates.
“While he will stop short of clearly guiding toward or away from 50bp cuts, he will leave them on the table,” economists continued.
The speech may also lay the groundwork for larger rate cuts, framing them within a clear macroeconomic rationale to avoid perceptions of "panic."