Analysis of Fed Chair Powell’s Comments: September Cut Likely, but What After?

by Antulio Bomfim of Northern Trust, 8/29/24

We interpreted today’s (August 23) remarks at Jackson Hole by Federal Reserve Chair Jay Powell as consistent with our view that, while the bar for not cutting rates in September is extremely high, much uncertainty remains about what exactly happens next. Our long-held view has been that the Fed’s Federal Open Market Committee (FOMC) will start cutting rates in September (we expect an 0.25 percentage point cut ), but that the committee will proceed carefully afterwards. Given that we don’t anticipate either a significant weakening in the labor market or an accelerated pace of disinflation, by “proceeding carefully” we meant that—contrary to market pricing—we could end up with only two rate cuts this year (September and December), with a pause in November. Based on his remarks today, Powell also seems to be leaving his options open for November. That said, we acknowledge that the risk of three cuts this year (September, November, and December) is high.

When addressing the near-term outlook for monetary policy, Powell was more explicit about a rate cut in September than he was at his July press conference. A first rate cut in September has been our base case since April, and we interpreted Powell’s comments at his July press conference to suggest that a cut in September had become the Fed’s base case too! In July, he said that “if we were to see, for example, inflation moving … more or less in line with expectations [and] growth remains … reasonably strong and the labor market remains … consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting.” Today, he was more categorical than in July, saying that “the time has come for policy to adjust.”

But Powell refrained from saying much about what is likely to happen beyond September, noting only that “the timing and pace of rate cuts will depend on incoming data, the evolving economic outlook, and the balance of risks.”

Our view has been that inflection points in the economy are typically difficult to navigate, which, from a monetary policy perspective, makes it especially tricky to provide explicit forward guidance. The labor market does seem to be at an inflection point, going from “overheated” to “normal.”

A key question for the Fed is whether labor market conditions stop at “normal,” or morph into what the most recent FOMC minutes called “a more serious deterioration.” Disinflation, too, seems to be at an inflection point, potentially transitioning from a stop-and-go pattern to showing more promising signs that a sustained downward trend to 2% is underway. But, as Powell remarked today, the Fed’s “task is not complete,” and upside risks to inflation persist. So his reluctance to provide more explicit forward guidance is understandable and, indeed, consistent with our expectations. How can you provide explicit guidance when you yourself are uncertain about the timing and pace of rate cuts?

We have long maintained that, after essentially operating as a “single-mandate central bank” in recent years, Fed behavior has been transitioning back to its normal dual-mandate mode. The single-mandate-like behavior was evidenced in the FOMC’s single-minded focus on restoring “price stability,” which is one half of its official mandate (the other half is “maximum employment”). Indeed, Powell noted today, the Fed’s “primary focus” over the past few years has been on “bringing down inflation, and appropriately so.” But today, he was more explicit than before in signaling that the times of single-mandate-like behavior are over. Echoing the most recent FOMC minutes, he noted that upside risks to inflation have diminished, and downside risks to employment have increased. And he repeated the FOMC’s latest statement that policymakers are now “attentive to the risks to both sides” of the dual mandate.