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What will Chair Powell say?
A Jackson Hole Preview
The Jackson Hole Symposium comes around every year and it’s always an event that markets watch closely. For a while now, the symposium has been a forum where the Fed Chair delivers a message, in an otherwise quiet period. August is usually a holiday month and there are no Fed meetings. That’s true of many of the other Central Bankers who also attend the meeting.
The Fed Chair’s speech is the only televised speech, without a Q&A that follows. Chair Powell is scheduled to speak on Friday, Aug 23, 2024 at 10 am ET. The Kansas City Fed will broadcast it on their YouTube Channel.
None of the other events are televised but, there will be plenty of side interviews that will discuss this year’s theme:
"Reassessing the Effectiveness and Transmission of Monetary Policy".
The symposium is arranged by the Kansas City Fed, at Jackson Hole, Wyoming. Against the beautiful backdrop of mountains and nature, central bankers, economists, academics, researchers and policy makers from around the world will gather to “explore lessons learned from the response of monetary policy to both the pandemic and the subsequent surge in inflation.”
Chair Powell’s Speech
There’s been plenty of speculation as to what Chair Powell says at the Jackson Hole meeting. But now that we have the FOMC minutes and some updated data on the labor market, we can make a more educated guess.
By now, there’s no doubt that Chair Powell will come out dovish. The bigger question is: how dovish? Coming up on 14 months, this will be the second longest times that the Fed has hiked and held, in recent history.
Source: WSJ
There are those that suggest that he may open the door to a 50-bp cut. In fact, some are pricing in a full 100bps of cuts by the end of the year. That’s 50bps in September and then 25bps in November and December each. That would take the current Fed Funds Rate to 4.25% - 4.50%.
This seems too drastic at this point. We’ve heard from the major retailers that seem to suggest that the consumer is doing fine. And while economic growth is slowing in the US, there are no signs yet that it will turn negative.
For 100bps of cuts across three meetings, we would need to see more severe signs of distress in the market.
Let’s break down the Nonfarm Payrolls (NFP) labor data from yesterday. According to the BLS’s previous estimates, 2.9 million jobs were added between April 2023 and March 2024. That’s an average of 242k jobs per month. After yesterday’s revision of -818k, the number stands at 2.1 million jobs or about 175k jobs added per month. Let’s look at this with some context.
Data Source: BLS.gov; Chart: MacroVisor
If we go all the way back to the 1940s, the average monthly additions to the NFP come out to 126k. But, we know that the NFP has high changes (both positive & negative) in times of distress so I adjusted the numbers to remove some of the outliers and the long-term average still comes out to about 140k per month. So the new run-rate of 175k jobs is hardly a distressed situation.
Sure, the labor market is not as strong as we had originally imagined but, by the Fed’s standards, there’s no need to jump on a 50bps cut in September. Particularly, not when inflation has just started to trend in the right direction. There’s still plenty that could wrong and we are yet to see if base effects kick in and push inflation higher in Q4.
While I hate to say this, there is also the political angle. We know the Fed is supposed to be apolitical but, doing a 50bps cut in September would tip the scales in the favor of the Democrats. So whether that’s their intention or not, it may end up looking like a political move.
All things considered, I’m still of the view that a 50bp in September will send the wrong message. It will signal that the Fed is seriously worried about something breaking in the economy, which as far as we can see, is not the case.
The Fed has an opportunity to manage the elusive soft landing and quite likely carry out a relatively smooth easing cycle. Let’s see if they make a misstep here.
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