Recent statements from Federal Reserve officials have indicated that a rate cut in September is very likely. Although the exact size of the reduction remains uncertain and dependent on data, Deutsche Bank economists believe that it is almost certain. The decision to cut rates in September will be primarily based on labor market data, according to the bank. The expectations are that the Fed will decrease rates by 25 basis points in each of the remaining meetings this year, followed by a pause until 25Q3, to gradually bring rates back down to a neutral level.
During his speech at the Jackson Hole conference, Fed Chair Jerome Powell hinted at future rate cuts without specifying the timing or amount. He stated that it is time for policy adjustments and that the direction for rate cuts is clear, pending on incoming data, the evolving outlook, and the balance of risks. While the markets awaited clues about monetary policy direction, Powell reflected on the factors that contributed to the inflation surge which led to 11 rate hikes from 2022 to 2023. He acknowledged the progress made in reducing inflation and indicated that the focus could now shift towards maintaining full employment, the other aspect of the Fed’s dual mandate.
Powell emphasized the Fed’s commitment to ensuring a strong labor market and continued progress on inflation. He pledged that the Fed will do everything possible to achieve these goals. With the inflation rate gradually returning to the Fed’s 2% target, the preferred inflation gauge has decreased to 2.5%, down from 3.2% a year ago and a peak above 7% in June 2022. Meanwhile, unemployment has slightly increased to 4.3%, which could typically signal a recession. However, Powell attributed this increase to more people entering the workforce and slower hiring, rather than widespread layoffs or a weakening labor market.
As the September meeting approaches, market participants are eagerly anticipating the Federal Reserve’s decision on interest rates. The labor market data will play a crucial role in determining the size of the rate cut, as the Fed aims to achieve its economic objectives. With Jerome Powell’s speech signaling a future of rate cuts and a focus on maintaining full employment, investors and analysts will closely watch for any new developments. Overall, the September meeting is likely to set the tone for the Fed’s future monetary policy decisions.