(Reuters) – Federal Reserve Chairman Jerome Powell said on Friday that the “time has come” for the central bank to cut interest rates as rising risks to the labor market left no room for further weakness and inflation was within reach of the Fed’s 2 percent target, signaling an early easing of monetary policy.
“Upside risks to inflation have declined. And downside risks to employment have increased,” Powell said in a highly anticipated speech at the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming. “It is time to adjust policy. The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
SHARES: The S&P 500 increased its gain to 0.92%
BONDS: The yield on the 10-year U.S. benchmark note fell to 3.812%. The yield on the 2-year note fell to 3.955%.
FOREX: The dollar index fell 0.394%
COMMENTS:
UTO SHINOHARA, EXECUTIVE DIRECTOR AND SENIOR INVESTMENT STRATEGIST, MESIROW, CHICAGO
“Powell confirmed market expectations for a rate cut in September and continued to insist on data dependence and the future economic outlook.
“The foreign exchange market is a relative game, and expectations that the Fed will soon join the other major banks in cutting rates are driving the dollar lower. Although the dollar is under pressure, implicit estimates for rate cuts have not changed much – the expectation for the September meeting is still around 30 basis points, and total expected rate cuts through the end of the year have currently only increased from around 95 basis points to 100 basis points.
“With inflation on track to reach its target, employment risks will play a larger role going forward following the sharp negative payroll revision, and the Fed’s reaction to the employment data will continue to move the dollar.”
STEVE ENGLANDER, HEAD OF GLOBAL FX RESEARCH AND MACRO STRATEGY, STANDARD CHARTERED BANK, NEW YORK
“I think the market reaction, which was a slightly weaker dollar and slightly lower bond yields, is about right. It’s not like he said, ‘Yeah, we’re going to do three 50-franc bills to start the easing cycle.'”
“He has focused very heavily on the fact that the inflation target is in sight and that they are worried about the labor market. He has said that the labor market does not need to weaken any further. In doing so, he is implicitly opening the door to an inflation rate of 50 without giving a timetable for that. We still don’t think 50 will be the first step, but it could happen quickly if the labor market continues to weaken.”
DAVID DOYLE, HEAD OF ECONOMICS, MACQUARIE GROUP, TORONTO
“Powell has set the stage for rate cuts to begin in September. The extent of easing in the coming months will depend on incoming data, with the labor market playing an important role.”
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA RESEARCH, ALLENTOWN, PA
“I was a little surprised that he was quite clear in his statement that inflation is falling. They are confident that inflation will continue to fall and that employment has not been negatively affected.”
“He wants to show the markets that the Fed is not lagging behind. By expressing the likelihood of a rate cut in September so clearly, he is actually cutting rates a month early.”
“Powell was clear about the first rate cut, but not so much about the next one, so I don’t think he’s going to come out of the gate with a 50 basis point cut. But I think the Fed wants to take this early part of the easing slow and steady.”
ELIAS HADDAD, SENIOR MARKETS STRATEGIST AT BROWN BROTHERS HARRIMAN, LONDON
“The reason Powell’s message is more dovish is his increasing concern about the US labor market. Growth in the US is relatively strong and the central bank is on the verge of easing monetary policy. That’s the perfect cocktail sauce for a stock rally. That will continue until next week, or at least until we see the next jobs numbers. To reverse that, we need stronger than expected gains in nonfarm payrolls.”
ANDRE BAKHOS, MANAGING MEMBER, INGENIUM ANALYTICS LLC, PLAINSBORO, NEW JERSEY.
“I now expect a 50 basis point cut, but with caution if the labor market data in early September is very weak. That could well turn the 50 basis point cut into a 75 basis point cut.”
“The longer-term trends in equities are rock solid and any weakness is an opportunity to increase exposure. But in the short term, we’re going to see choppy, erratic, volatile moves again because nobody really knows what’s going to happen now that he (Powell) has put his cards on the table and said what everyone expected. We’ll have to wait and see how this plays out.”
GLEN SMITH, CHIEF INVESTMENT OFFICER, GDS WEALTH MANAGEMENT, TEXAS
“Powell’s comments at Jackson Hole virtually guarantee a 25 basis point rate cut in September, as the Federal Reserve has been signaling for some time. The September meeting is in three weeks and only a handful of jobs and inflation data will be released before then. It is unlikely that these next few pieces of data will change the Fed’s plans to cut rates by 25 basis points next month.”
“While a September rate cut is essentially a done deal at this point, the more important question is whether this will be a one-off rate cut or whether this will be the start of a broader rate-cutting cycle. This will be determined by economic data over the next two to three months. The market is expecting multiple rate cuts over the next 12 months, although we would remind investors that the market has been overly optimistic about rate cuts in the past.”
“We have now seen more evidence than ever that a soft landing has been achieved. Since the post-Covid rise in inflation, consumer prices are closer to the Fed’s 2% target than ever before. While economic activity has slowed, that is very different from a recession.”
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO
“He noted the growing concerns about the labor market and that really helps confirm market expectations for multiple cuts in the fall months. I think the key phrase there is that they will ‘do everything they can to support a strong labor market as we continue to make progress toward price stability.’ That suggests to me that he recognizes the growing concerns among policymakers about where labor markets are going.”
“He has not indicated a 50 basis point cut for September and I think that is roughly in line with what the markets are expecting.”
WASIF LATIF, PRESIDENT AND CHIEF INVESTMENT OFFICER, SARMAYA PARTNERS, PRINCETON, NEW JERSEY
“We’re seeing from the price action that the markets are cheering. They’re finally getting the candy they’ve been expecting from the Fed. In terms of rate cuts, the forecasts have been a little mixed depending on who was speaking from the Fed. But when you hear from the chairman, he’s obviously speaking for the entire committee. And now it’s clearly there, the forecast is there that rate cuts are coming. The markets are cheering about that. The markets have been expecting this candy and now they’re getting it. But like a lot of candy, there’s that immediate sugar rush and then comes the reckoning, which we still have to go through.”
PAUL CHRISTOPHER, HEAD OF GLOBAL STRATEGY, WELLS FARGO INVESTMENT INSTITUTE, ST. LOUIS, MISSOURI
“There’s no question they’re going to cut rates, but the question is by how much… It’s more dovish than I would have expected because, based on the data we’ve seen, the labor market is not really at a level close to a recession. Finally, we heard Fed officials yesterday arguing for a gradual and methodical approach.”
“Today you can hear the Fed chairman starting with statements saying he neither wants nor welcomes a further slowdown in the labor market.”
“It signals that they are definitely going to cut rates. Can they still be gradual? Yes. It’s a positive message. It’s a clear message. Is it a signal to throw all your money into the market? No. They’re still going to be gradual and the market may still be getting too excited about the speed with which the Fed will respond.
Therefore, we expect there to be more volatility in this market through the end of the year.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“Powell is more cautious and says there is enough room to respond to any risks we might face. I think that’s the key.”
“He is suggesting that if the labor market weakens further in September, we should expect an interest rate cut of 50 basis points instead of 25.”
“‘It is time to adjust policy’ and ‘we do not seek or welcome a further slowdown in the labor market.’ That is another important point and it tells me that we should expect a 50 basis point cut in September.”
“It seems to be reacting to the big benchmark revision we had recently.”
“He also says that confidence has grown that inflation is on the way back to 2%. That’s a dovish Powell today, and we see the markets reacting accordingly.”
“I think we will have two cuts totaling 75 basis points this year, especially if the August jobs report indicates further weakness.”
MARC CHANDLER, CHIEF MARKET STRATEGIST, BANNOCKBURN GLOBAL FOREX, NEW YORK
“I think the market will be really cautious at first, lowering rates and weakening the dollar. I’m not sure yet if that will continue. I don’t think it’s telling us anything we didn’t already know.”
“He’s basically saying the magnitude will be determined by the data. And when you look at what the labor market data and the consumer price index are likely to bring ahead of the Fed meeting, and the general tone, I don’t see any strong urgency or panic like a 50 basis point cut would suggest.”
KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS, PITTSBURGH
“If we go through the economic history of the last few years, it seems like we’re at a point where the Fed needs to be more accommodating, and the markets are responding.”
“All (Powell) has ever told us is that it’s based on data. They’re not going to cut rates immediately.”
“Particularly on Bostic’s comments – and they all know the script and stick to it – he was quite dovish, particularly on the real interest rate. He said it was hawkish. These comments suggest that cuts are beginning and the market is nodding in agreement.”
(Compiled by Global Finance & Markets Breaking News Team)
