Written by Benjamin Picton, Senior Macro Strategist at Rabobank
During his speech at the Jackson Hole Symposium on Friday evening, Jerome Powell confirmed speculations by stating that the Fed is ready to implement an interest rate cut in September. He emphasized the need for policy adjustment but did not specify whether the cut would be the standard 25 basis points or a larger 50 basis point reduction. Market expectations are divided, with OIS futures pricing in 29bps for September, making it a close call.
Powell highlighted the noticeable slowdown in the labor market, indicating that hiring has decelerated and key labor market indicators have reverted to pre-pandemic levels. He expressed skepticism about the labor market driving inflationary pressures in the near future.
Although Powell acknowledged the economy’s solid growth, he emphasized the Fed’s shift towards prioritizing maximum employment over combating inflation. He mentioned that inflation risks have diminished, but the Fed does not welcome further labor market deterioration.
Following Powell’s remarks, asset prices responded predictably, with stock indices rising, Treasury yields falling, and commodities like crude oil and gold seeing gains. The Bloomberg Dollar spot index also declined, resulting in a death cross on the chart.
Rabobank’s US Strategist, Philip Marey, adjusted his Fed policy rate forecast to include four consecutive cuts (September, November, December, and January) due to labor market softening and the potential for an economic downturn. The uncertainty surrounding US politics, particularly under different election scenarios, also influences Rabobank’s rate cut predictions.
The situation in the Middle East, specifically the recent exchange of fire between Israel and Hezbollah, adds a layer of geopolitical risk that could impact supply-side dynamics. Despite the weekend’s events, both sides seem hesitant to escalate further, signaling a temporary respite from potential conflict.
While markets initially showed little reaction to the Middle East developments, the situation remains fluid, with Hezbollah and other groups in the region potentially seeking retribution against Israel. The risk of further escalation lingers, underscoring the ongoing geopolitical tensions in the region.
Loading…