Market Analysis

Powell will provide evidence at Jackson Hole next week in support of a "orderly" September rate cut

Amos Simanungkalit · 16 Aug 20249.1K Views

Federal Reserve Chairman Jerome Powell is expected to outline the rationale for rate cuts starting in September during his upcoming speech at the annual central bank symposium in Jackson Hole, Wyoming, scheduled for next week. However, Powell is anticipated to emphasize that any cuts will be "orderly," downplaying the likelihood of a 50 basis point reduction next month.

UBS economists recently updated their rate cut forecast, stating, "We anticipate that Chair Powell will argue for an orderly reduction in monetary policy restrictiveness during his speech at Jackson Hole on Friday morning, August 23. By 'orderly,' we mean 25 basis point cuts rather than 50 basis points."

The UBS team forecasts three 25 basis point cuts this year, one at each of the Federal Open Market Committee (FOMC) meetings in September, November, and December. They believe the Fed's September meeting will show a consensus among voting members that current policy is restrictive in light of slowing economic growth.

Powell is likely to advocate for a gradual reduction in restrictiveness over the next few meetings, as part of a policy recalibration, while remaining data-dependent, UBS added. However, the Fed Chair is not expected to suggest that rate cuts will continue indefinitely. Instead, he will likely emphasize that any further cuts after the initial recalibration will depend on ongoing progress toward the Fed’s 2% inflation target, balanced against the risks to labor market expansion.

Many on Wall Street have called for more aggressive cuts following the weaker July nonfarm payrolls report, which triggered the Sahm Rule—a measure indicating a recession when the three-month average U.S. unemployment rate rises by 0.50% or more from its 12-month low. However, UBS economists noted that, despite slowing growth, the situation may not be as dire as it seems.

Morgan Stanley also downplayed the recessionary signal from the rise in the unemployment rate, suggesting that the current increase is less concerning than in previous cycles because labor demand remains relatively strong. "The recessionary signal from the unemployment rate should primarily come from a decline in labor demand, and while the current rise in the unemployment rate appears significant, it’s actually only about half as strong as in previous downturns," Morgan Stanley stated.

While the Fed might pause rate cuts to reassess, UBS is confident in its projection that headline PCE inflation will reach 2.0% and core PCE inflation 2.1% in the second quarter of next year. This could encourage the Fed to continue rate cuts into next year.

"Three successive 25 basis point cuts this year would better align policy with a policy rule, and the FOMC may choose to continue cutting in 2025, especially if our forecast of further economic slowing, if not recession, holds true," UBS concluded.