US - Powell confirms September cut
Powell started his Jackson Hole speech with the statement: 'The time has come for policy to adjust'. The direction of travel is clear, but, as expected, there was no explicit mention of the magnitude of the initial rate cut, nor any guidance on the longer term trajectory. Notably, Powell was significantly firmer in his assessment of the labor market. In July he used the term 'normalization,' today he talked about 'cooled considerably,' and the an 'unmistakable slowdown.' Perhaps the most informative statement came in that the Fed does 'not seek, nor welcome further cooling in labor market conditions,' offering a hand to the doves.
Apart from his view on the current economic outlook, Powell summarized his view on the latest inflationary episode and an evaluation of the Fed's real-time response, acknowledging the mistake in assessing the inflation as transitory. Particular attention was paid to how inflation could fall, without an increase in the unemployment rate, which he primarily attributed to inflation expectations, and the importance of credibly bringing inflation back to 2%, offering a hand to the hawks.
Between now and this first cut, we will still see an inflation and labor market report. Without explicit guidance these may lead to some increased volatility as markets assess the relative likelihoods of a 25 or 50 bps cut. Despite the relatively dovish tone, we continue to expect a 25 bps cut, as the overall picture continues to allow for a gradual easing cycle.