Because the Fed didn’t cut rates
Powell rejected the idea of a first cut of 50 basis points and commented that the decision on the timing has not yet been made. The point of Jeffrey Cleveland, chief economist of Payden & Rygel
During the July meeting, the Federal Reserve unanimously decided to leave interest rates unchanged, stuck in a range between 5.25% and 5.50%. Within the policy statement, policymakers recommitted to paying attention to both aspects of the Fed's dual mandate, not just inflation, which has actually shown some signs of improvement, but also the unemployment rate, which “ has risen although it remains under control."
During the post-meeting press conference, Chairman Powell remained calm when faced with questions about whether the Fed is already behind the curve. Powell said that a premature rate cut would “jeopardize progress on the inflation front,” but also that waiting too long would “put the economy at risk.” Finding the balance point is not easy and the decision made in July was a decision taken under conditions of uncertainty.
POWELL'S WORDS
On the labor market front, Powell said he was aware of the so-called Sahm Rule, according to which a recession occurs when the three-month moving average of the national unemployment rate increases by at least 0.50 percentage points compared to the minimum of the three-month averages. months of the previous 12 months, but he defined it as a “statistical regularity”, not a law of the economy.
According to him, the labor market is not in a phase of deterioration, today it would be "more balanced" and "strong, but not overheated": even the picture of anecdotal data would not be truly negative, it would highlight weaker points, but the growth would be stronger than in other regions."
THE FED'S STALLOW ON RATES
Regarding the September meeting and the long-awaited rate cut, Powell rejected the hypothesis of an initial cut of 50 basis points and commented that the decision on the timing has not yet been made, in this sense the data will be decisive. Powell's words did not go beyond September, since it is impossible to know in advance the path of the Fed Funds rate.
The post-meeting press conference highlighted public sentiment, which believes that a reversal of the labor market is underway and that the Fed should break the deadlock and begin reducing interest rates. A situation we already witnessed last December, when, after a series of weak inflation readings, the press began to push for a rate cut, only to change its mind when faced with a new inflation surge.
THE SCENARIO ON THE FED
In conclusion, we believe a rate cut in September is a possibility, but we are less confident than the market, which prices a 25 basis point cut to 106%. We believe the unemployment rate will end the year at 4% or less and await tomorrow's data. Today the market is already pricing in around 3.5 rate cuts by January 2025 and seven cuts by December 2025, so the consensus is leaning towards a more critical labor market than we currently predict.
As Powell stated, it's a question of balance: while the Fed is still weighing the two risks, the market already seems convinced that the needle is pointing in a clear direction.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-la-fed-non-ha-limato-i-tassi/ on Fri, 02 Aug 2024 06:26:11 +0000.