At the start of the month Wall Street was hopeful—but not convinced—that it would get a much-anticipated interest rate cut in September.
Fed Chairman Jerome Powell's Jackson Hole speech sealed the deal for many that tapering was indeed imminent. The rate currently stands at 5.25%—the highest in more than two decades.
But a combination of economic data and comments from FOMC members — including Powell — now have analysts wondering if the cut will be more significant than previously expected. According to some, Powell's « risk bias » is changing.
The likes of Bank of America and investment fund Vanguard had earlier cut rates by 0.25%, or 25 basis points (bps), next month, but arguments for a 50bps (0.5%) cut have begun to gather pace.
JP Morgan, for example, this week expects the Fed to cut rates by 100 bps—a full percentage point—by the end of the year.
With three sessions remaining, at least one cut must be 50 fps, paired with two cuts at 25 fps.
The shift in expectations comes as volatile data continue to make reading the Federal Open Market Committee's (FOMC) double-edged mandate difficult.
That dual mandate is to reduce inflation—which it has so far done relatively successfully without tipping the economy into recession—but also increase employment.
A Report The U.S. Bureau of Labor Statistics revealed this week that unemployment rates are rising in metropolitan areas Demand for workers softens.
On the contrary, productivity is increasing, according to the Bureau of Labor Statistics said earlier this month.
This has « created an odd combination of growing concerns about the US slipping into recession with financial market optimism about the future path of business sector performance, » JP Morgan wrote in a note this week.
The bank added to the seen note Good luck The central bank is shifting from a gradualist approach to fears of cutting interest rates too late.
Fed President Austin Goolsbee aired this concern in an exclusive interview Good luck Earlier this month.
He warned: “The conditions were very different when we set the rate at this level. Every month we get inflation like we've seen – inflation is lower than expected – we're tight in real terms.
As a result, he asks himself and his fellow FOMC members to ponder: « When should the Fed really tighten? »
« The answer is if you want to stay tight as long as you can and you're afraid the economy will overheat, » he explained. « This, to me, doesn't sound like a warming economy. »
« So I think we need to know that we're tight for a long time, because if we are, we're going to have to think about the real side of the mandate, and employment is going to get worse. »
The central bank is reassessing the risk
Whether experts are pricing in a 25 bps cut, a 50 bps cut, or an emergency off-schedule cut, one thing they can all agree on is that the FOMC is making adjustments.
In his speech in Jackson Hole last week Sir Powell said: “The time has come to fix policy. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.
This suggests that Powell and his colleagues wanted to balance both sides of their mandate, Wharton Professor Jeremy Siegel writes in his article. Weekly comment WisdomTree for investment professionals.
In his commentary on Monday, Siegel wrote: « While Powell suggested that some of the increase in unemployment was due to an increase in the labor supply, he highlighted the obvious softness in the labor market and further weakening would not be welcome. »
The professor emeritus of finance at the University of Pennsylvania falls in the base-rate-lower-for-now camp 5.25% and 5.5%—”4% or less without delay.”
« In other words, [Powell] Work does not seek to use high unemployment as a force to raise inflation to 2%. This is a very important change,” wrote Siegel, who is a senior economist at Wisdom Tree.
While JPMorgan may not subscribe to Siegel's call for immediate cuts, analysts at America's largest bank have noted a shift in Powell's « risk appetite. »
« Information from Chairman Powell's Jackson Hole speech last week confirms that this shift in risk appetite has occurred and that the Fed does not want to see labor conditions ease further, » they wrote.
« We believe this will put the central bank on track to deliver around a 100bp step-down in rates by the end of the year. »
If the Fed doesn't cut rates this year, some analysts think Powell could not only face a market rout, but risk tipping the economy into recession.
« We're not saying a recession is coming, » wrote Thierry Wiseman and Gareth Perry, FX and rates strategists at Macquarie. Good luckBut added without the cuts « a recession would be more desirable. »
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