Van Lanschot Kempen: Fed ready to cut further
- Majority of policymakers signal two more cuts this year
- Fed delivers 25 basis points cut after Jackson Hole pivot
- New appointee Miran only dissenter in favour of 50 basis points cut
While the previous Fed meeting in July gave no hint whatsoever for a rate cut and raised the bar for easier monetary policy, Fed-Chair Powell pivoted at the annual Fed conference in Jackson Hole. At the mountain resort in Wyoming, Powell said that the downside risks to unemployment are rising. With policy in restrictive territory and shifting balance of risks, an adjustment of the Fed’s policy stance was warranted, according to Powell. That adjustment was clearly not a rate hike, so a rate cut was fully priced for today’s meeting.
The outlook for inflation has not changed much lately. Import tariffs have started to show up in goods inflation, which increased to 1.5% In August. Overall inflation hasd already stopped falling even before the tariffs were implemented. The Fed left its inflation projection for this year unchanged at 3.0% for total and 3.1% for core inflation.
For next year the median projection was increased from 2.4% to 2.6% for total and core inflation. Expected GDP growth was raised by 0.2% points for 2025 and for 2026, to 1.6% and 1.8% respectively. This is close to trend growth, so the Fed does not foresee a meaningful rise in unemployment. It expects unemployment at 4.5% this year and 4.4% next year.
So, one could raise the question why the Fed would cut at all. In the press statement and at the press conference, Powell repeatedly pointed to a change in the balance of risks. Back in June the Fed saw a balanced labour market and elevated inflation, which warranted a moderately restrictive stance of monetary policy. But the labour market has weakened since. Job growth has slowed to only 29,000 on average in the three months through August.
This is the lowest pace of job creation since 2010. A strong downward revision to the number of jobs in 2024 and early 2025 has confirmed the weakness in the labour market. Moreover, vacancies have now fallen below the number of unemployed, and layoffs are trending higher.
Thus, the balance of risks has moved towards the weaker labour market, arguing in favour of today’s rate cut. When asked at the press conference, Powell acknowledged that the changed balance of risks reduces the need for restrictive monetary policy. Therefore, the Fed moved further towards a neutral stance today.
Looking forward, the Fed foresees more rate cuts. Almost half of the policy committee members foresee two more rate cuts. A significant minority foresees no more rate cuts, and two members are in between. The new appointee at the committee, former economic advisor to Trump Stephen Miran was the only dissenter at today’s meeting, voting in favour of a 50 basis points cut. The two dissenters at the previous meeting, also appointed by Trump, voted in line with the majority today.
Although the Fed does not disclose which policymaker submitted which projection, the two dissenters at the June meeting are most likely part of the largest group of policymakers foreseeing two more rate cuts this year. In those projections one member, most likely Miran, stands out with a call for five more cuts this year.
Although the political pressure on the Fed to cut rates will probably not ease with today’s cut, looking at the projections it seemed to have little effect on today’s discission making in the policy committee. Which is a good thing for the independence of the Fed. At the press conference Powell seemed somewhat cautious about further cuts, mentioning a meeting-by-meeting situation. Especially framing this as a risk-management rate cut does not sound like a central banker who is in a hurry to cut further. Nevertheless, one or two more rate hikes this year are highly likely.
Bond markets showed some volatility around the press conference. The two-year yield initially fell by 7 basis points, but this was short-lived, with in the end virtually no change. The ten-year yield also fell initially but ended a couple of basis points higher. The S&P 500 showed a minor loss. This shows that markets saw this as a slightly hawkish cut, but not with great conviction.