August 01, 2024 at 04:53AM
The FOMC statement didn’t offer up too much but the minor changes are still a small step towards making a change on rates. The most notable thing was highlighting “risks to both sides of the dual mandate”. It doesn’t sound exactly dovish but it is consistent with the Fed’s motives of starting to change things up. The key takeaway yesterday though was all about Powell’s language in the presser.
He brought up the idea of there maybe being “several” rate cuts this year while mostly reaffirming the current market pricing. The biggest thing is that there wasn’t any pushback to what traders have priced in going into the Fed meeting yesterday. September was already fully priced in and there’s roughly 100 bps of rate cuts by Q1 2025. Powell’s remarks only served to green light that pricing.
That is leaving us in a position to believe that the Fed will cut rates in September, barring any shocks or weird happenings in the economy between now and then. And that mostly lies with the inflation data to come. As for the economy and jobs data, I would even dare say that the risks are rather asymmetric now.
The idea is that the disinflation process is continuing and the Fed believes that they can manage a soft landing on the economy. On the former, they would just need a little bit more of a nudge. But I still think they would go in September even if inflation numbers hold or are marginally better than the last two months.
As for the economy, they’re more than convinced that conditions are holding up well enough. Yes, there is a slowdown but no major recessionary signals. That means the Fed does not need to oversell the need to cut rates urgently.
In that lieu, they have the flexibility to sell the rate cut narrative in September. If the jobs report is stronger than expected this week, it just means that the labour market is converging towards a soft landing. Or at least that is what the Fed will try to argue. But if it is softer than expected, then it just rebuffs the current stance that September is very much a done deal barring any major surprises.
This article was written by Justin Low at www.forexlive.com.
