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Market Update

Powell says “the time has come” for policy to adjust during Jackson Hole remarks

Date:
August 23, 2024

Summary

Today, Federal Reserve Chair Jerome Powell spoke at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming. In his speech, Powell stated that it is now time for the Federal Open Market Committee (FOMC) to adjust their focus from fighting inflation pressures in the United States to providing maximum employment. Having observed the rise in unemployment over the past six months, Powell emphasized that the FOMC does not welcome additional cooling in labor market conditions. He believed that inflation is on a sustainable path to the 2% target. Hence, it is time for the FOMC to balance the risks of inflation and the risks of rising unemployment. Powell said it could be appropriate to start cutting the fed funds rate at the September FOMC meeting and indicated that the degree of policy softening will be determined as more data becomes available.

Key takeaways

  • Powell explained why inflation had increased rapidly during COVID and how unprecedented the movement had been. The FOMC held their key policy rate at a restrictive level over the past year, helping to cool inflation without a severe fall in employment.
  • The labor market is now less tight than it was pre-pandemic, and the FOMC believes it is unlikely the jobs market will be a source of inflation any time soon.
  • The Fed sees the risks of increasing unemployment outweighing the risks of inflationary pressures as the inflation rate has decreased significantly from the highs of 2022.
  • Powell indicated that the time has come for the Federal Reserve to cut its key policy rate as the focus on its dual mandate has changed from lowering inflation to supporting maximum employment.
  • Post-remarks, the market is now pricing a 32% probability of a 50-basis-point rate cut at the September meeting, up from a 22% probability earlier this morning. There is now a 45% probability of 75 basis points of total cuts by the November meeting.

Source: Chatham Financial

Currently, the market is pricing in a 45% probability of four rate cuts over the next three FOMC meetings before the end of 2024. This view on rate cuts has been strengthened by Powell’s sentiment that the FOMC’s biggest worry is no longer inflation but a cooling labor market. One-month Term SOFR is expected to be 4.33% at year-end versus 4.50% following the July 31 FOMC meeting. In 2025, the market is anticipating the Fed funds rate to be cut another 200 bps — a significant easing of monetary policy. Since the last FOMC meeting on July 31, market swap rates have declined further by another 25–35 basis points. Powell said that the FOMC’s policy decision will remain data dependent but with a larger focus on jobs data rather than inflation data. Powell’s remarks showed that the FOMC is turning their policy focus towards warding off a recession.

One-month Term SOFR swap rates — July Fed meeting vs. 8/23/2024

Source: Chatham Financial

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Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

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