Powell Q&A: 50 bps Fed cut again in Dec’24 may not be assured

·         Although Powell batted for blackout period data to justify the jumbo cut, in reality, he may have gained confidence about no Trump 2.0 after the Trump-Harris debate

·         Powell almost acknowledged that the Fed may have missed one rate cut opportunity in June-July’24 due to the concern of Trump tantrum 2.0

·         Looking ahead, the Fed may pause in Nov before going for a 25/50 bps rate cut in Dec’24 depending upon actual economic data & outlook thereof

On Wednesday, Wall Street Futures, Gold surged initially as a knee-jerk reaction to an unexpected jumbo rate cut by the Fed (-50 bps) against the general market expectations of -25 bps; but soon stumbled as such jumbo rate cut may be ‘political’ and also indicating ‘panic’ by Fed. As the overall economic data does not indicate any early signs of recession/hard landing, but despite that Fed is going for unusual crisis-era rate cuts of 100 bps in three months, the market may be nervous about any real possibility of next financial crisis, which Fed may be aware, but the market is not.

Also, the Fed rate cuts of -100 bps by Dec’24 were partially discounted by the market already going by the recent rally, and thus this may be another example of buying the rumor and selling the news/fact. And Fed rate cuts; i.e. lower bond yield may be negative for the banks as their NIM/NII may be affected. Thus overall, Friday is a classic example of long unwinding and fresh shorts at record-high levels for both stocks and Gold. Also, the Fed has projected a higher terminal repo rate at +3.00% against earlier +2.75%. On Friday, Friday, Wall Street Futures and Gold closed almost flat after a roller coaster move. Gold stumbled from around 2600 to 2550, while Dow Future also wobbled by more than 700 points.

On Wednesday (18th Sep’24) all focus of the market was on the Fed’s policy decision, where the Fed was expected to cut rates gradually by normal -25 bps and indicate another -25 bps rate cut in Dec’24. In line with Jun’24 dot-plots/SEP, the market was also expecting another -100 bps rate cut each in 2025-26 (at every QTR end @25 bps) and one additional -25 bps rate cut in Mar’27 for a cumulative -275 bps rate cut (@25 bps * 11 times) to bring down repo rate from present +5.50% to +2.75% against longer run terminal/neutral rate against durable core inflation target of +2.0% and sustainable unemployment levels around 4.2% (as per June’24 SEP).

Although the FFR (SWAP) was indicating only around 50% of -50 bps rate cuts in Sep/Dec’24 and almost 100% for -25 bps rate cuts, the Fed goes for the -50 bps rate cut in Sep’24 with an indication (dot-plots) of another -50 bps rate cut in Dec’24. And Fed continues to cut -100 bps in 2025 (@-25 bps each QTR end) in line with June’24 dot-plots and finally -50 bps rate cuts in 2026 (Mar’26+June’26) for a terminal repo rate +3.00% by Dec’26.

As per Sep’24 Fed SEP/dot-plots, there will be no further rate cuts in 2027 and the terminal/neutral rate would be +3.00% against earlier June’24 dot-plots of +2.75%. Thus the core real repo rate by Dec’26 and Dec’27 is projected at around +1.00% (repo rate 3.00% -2.00 core inflation) in Sep’24 dot-plots against +0.75% in earlier June’24 dot-plots/SEP. This Fed stance is slightly less dovish than it seems at first glance even though Fed/Chair Powell always tries to junk any SEP/dot-plots above 12 months.

Full/selected text/transcript of Fed and Chair Powell’s comments in the Q&A: 18th Sep’24

·         Fed decided on jumbo rate cuts after having August job and inflation along with the Fed Beige Book report in the blackout period.

·         Fed decision was also influenced by the overall data including the July job and inflation report along with the latest QCEW (NFP payroll revision-preliminary), indicating high probably significantly negative NFP payroll job revision.

·         Fed miscommunication was partly due to some important data published during the blackout period.

“So, since the last meeting, okay, the last meeting we have had a lot of data come in. We've had the two employment reports, July and August, we've also had two inflation reports, including one that came in during the blackout, we had the QCEW report, which suggests that maybe, that not maybe, but suggests that the payroll report numbers that we're getting may be artificially high and will be revised down, you know that. We've also seen anecdotal data, like the Beige Book, so we took all of those and we went into a blackout and we thought about what to do, and we concluded that this was the right thing for the economy, for the people that we serve, and that's how we made our decision.”

·         Looking ahead, the Fed will take an appropriate policy action (cut at 25 or 50 bps or pause) depending upon actual economic data and outlook, but overall it may be in line with the latest SEP/Dot-plots.

 “Sure, so a couple of things, a good place to start is the SEP, but let me start with what I said, which was that we're going to be making decisions meeting by meeting based on the incoming data, the evolving outlook, the balance of risks. If you look at the SEP, you'll see that it's a process of recalibrating our policy stance away from where we had it a year ago, when inflation was high and unemployment low, to a place that's more appropriate given where we are now and where we expect to be. And that process will take place over time.”

·         Fed is not in a rush to cut rates but will be flexible and nimble in line with overall economic data & outlook thereof and broadly in line with SEP/dot-plots

“There’s nothing in the SEP that suggests the Committee is in a rush to get this done. This process evolves. Of course, that's a projection, that's a baseline projection. We know, as I mentioned in my remarks that the actual things that we do will depend on the way the economy evolves. We can go quicker if that's appropriate; we can go slower if that's appropriate. We can pause if that's appropriate. But that's what we are contemplating, again, I would point you to the SEP as just an assessment of where what the Committee is thinking today. What the individual members rather, are thinking today assuming that their particular forecasts take, are realized.”

·         Looking ahead, the Fed will gradually dial back restrictive rates in line with SEP/dot-plots to balance the dual mandate of maximum employment and 2% price stability (inflation); Fed’s dot-plots are simply an average of individual estimates/median and not a scientific approach.

“I think people write down their estimate, individuals do, and I think every single person on the Committee, if you asked them what's your level of certainty around that, they would say there's a wide range where that could fall. So, I think we don't know, they're model-based approaches and empirically based approaches that estimate what the neutral rate will be at any given time. But realistically, we know it by its works.”

·         Fed finished the rate hike cycle in July’23, when the unemployment rate was 3.5%, while core PCE inflation was 4.2%; today the unemployment rate is 4.2%, while core PCE inflation is +2.8%.

“So that leaves us in a place where we'll be, where we expect in the base case to be continuing to remove the restriction, and we'll be looking at the way the economy reacts to that, and that'll be guiding us in our thinking about the question that we're asking at every meeting, which is; is our policy stance the appropriate one? We know, if you go back, we know that the policy stance we adopted in July of 2023 came at a time when unemployment was 3 and 1/2 percent and inflation was 4.2 percent. Today, unemployment is up to 4.2 percent, inflation's down to a few tenths above 2.0”.

 ·         Fed will dial back restrictive rates; i.e. cut interest rates gradually to balance both sides of the dual mandate (maximum employment and price stability) in line with actual incoming economic data and outlook thereof for a longer-term terminal rate, which would be goldilocks in nature; i.e. not cause any overheating or over cooling (slack) for the economy, helping to maintain price stability and maximum employment.

“So, we know that it is time to recalibrate our policy to something more appropriate given the progress on inflation, and employment, moving to a more sustainable level, so the balance of risks is now even. This is the beginning of that process I mentioned the direction of which is toward a sense of neutrality, and we'll move as fast or as slow as we think is appropriate in real-time. What you have is our accumulation of individual estimates of what that will be in the base case”.

·         Despite one dissent vote by the Fed Governor Bowman, who batted for a -25 bps cut instead of -50 bps, overall FOMC discussion was quite vibrant with various views, but eventually, there was broad support for the jumbo cut of -50 bps in the September meeting and subsequent projections of cuts in the SEP/dot-plots with lots of common views/grounds.

·         Powell also claimed he mentioned intense debate/discussion in the September FOMC meeting about the cut in his Jackson Hole Speech on 23rd August.

“I think we had a good discussion, if you go back, I talked about this at Jackson Hole, but I didn't address the question of the size of the cut and left it open and I think we left it open going into blackout, and so there was a lot of discussion back and forth, good diversity of division, excellent discussion today. I think there was also broad support for the decision that the Committee voted on. So, I would add though, look at the SEP, all 19 of the participants wrote down multiple cuts this year. All 19-- That's a big change from June, right? Seven of the, seven of them wrote down three or more and sorry, 17 of the 19 wrote down three or more cuts and 10 of the 19 wrote down four or more cuts. So, there is a dissent and there's a range of views but there's a lot of common ground as well”

·         Powell was asked whether the Fed will go for a -25 bps cut every other meeting in 2025; i.e. every alternate meeting/QTR end, Powell invariably said ‘yeah’, but also emphasized meeting to meeting and data-dependent approach; The Fed is now almost fully confident that core inflation is coming down towards +2.0% target on a sustainable basis, but Fed is not in a rush to cut rates every meeting or even every alternate meeting; the Sep’24 jumbo cut of -50 bps is showing Fed is confident about price stability mandate without causing a hard landing.

“Yeah, we're going to take it meeting by meeting, as I mentioned, there's no sense that the Committee feels it's in a rush to do this. We made a good, strong start to this and that's, frankly, a sign of our confidence-----confidence that inflation is coming down toward 2 percent on a sustainable basis. That gives us the ability. We can, you know, make a good, strong start. But, and I'm very pleased that we did. To me the logic of this, both from an economic standpoint and also from a risk management standpoint, was clear. But I think we're going to go carefully meeting by meeting and make our decisions as we go”.

·         By projecting a 4.4% unemployment rate by both Dec’24 and Dec’25, against present levels of 4.2%, the Fed will ensure that it does not go above the 4.5% red line (?) and remains around the present state, which is quite robust (despite the 6MRA is now at 4.1%), supporting resilient consumer spending, solid economic growths, and falling inflation; i.e. Fed wants to maintain the current Goldilocks nature of the US economy going forward.

“So, again, the labor market is actually in solid condition. And our intention with our policy move today is to keep it there. You can say that about the whole economy. The U.S. economy is in good shape. It's growing at a solid pace, inflation is coming down, the labor market is at a strong pace, and we want to keep it there. That's what we're doing.”

·         Despite opting for the -50 bps large-sized rate cuts, the Fed is not behind the curve and the jumbo cut may be also interpreted as a commitment by the Fed not to fall behind the curve.

“I would say we don't think we're behind, we do not think-- we think this is timely, but I think you can take this as a sign of our commitment not to get behind. So, it's a strong move.”

·         Despite rate cuts by several other major G10 central banks in the last few months, the Fed waited with great patience to gain confidence about the disinflation pace, which has paid dividends as the Fed is now almost fully confident that core inflation is falling towards +2.0% targets on a sustainable basis.

“So, I think it's about, we come into this with a policy position that was put in place, as you know, I mentioned in July of 2023, which was a time of high inflation and very low unemployment. We've been very patient about reducing the policy rate. We waited, other central banks around the world have cut, many of them several times. We've waited and I think that that patience has paid dividends in the form of our confidence that inflation is moving sustainably under 2 percent.”

·         Thus Fed took a ‘strong starting move’ of cutting rates by -50 bps, but this should not be assumed as the new norm/pace/base case. Going forward Fed will move gradually in 2025 in line with SEP/Dot-plots, but at the same time, the Fed would be flexible and nimble and is prepared to cut faster or slower in line with overall real economic data & outlook thereof.

“So, I think that is what enables us to take this strong move today. I do not think that anyone should look at this and say oh, this is the new pace. You have to think about it in terms of the base case, of course, what happens will happen, so in the base case what you see is look at the SEP, you see cuts moving along, the sense of this is we're recalibrating policy down over time to a more neutral level. And we're moving at the pace that we think is appropriate given developments in the economy and the base case. The economy can develop in a way that would cause us to go faster or slower, but that's what the base case is.”

·         Despite the -50 bps rate cut and another probable -50 bps rate cut in Dec’24, the Fed will not stop the QT abruptly mid-cycle unlike the late 2019 repo market crisis as abundant reserve now (in the form of ON RRP). Fed is also fully aware that QT and rate cuts are contradictory but also thinks that these two instruments can run side by side for the time being as both are some kind of normalization process (balance sheet and rates)

“So, in the current situation, reserves have been stable, they haven't come down. So reserves are still abundant and expected to remain so for some time. As you know, the shrinkage in our balance sheet has come out of the overnight RRP. So, I think what that tells you is we're not thinking about stopping runoff because of this at all. We know that these two things can happen side by side, in a sense they're both a form of normalization and so for a time you can have the balance sheet shrinking but also be cutting rates.”

·         Despite cooling off from recent very hot conditions, the US labor market is still robust and even at maximum employment levels currently with an average unemployment rate of around 4.0% (Fed’s longer-term sustainable minimum unemployment rate; i.e. maximum employment). Thus at present at around 4.0% average unemployment rate and falling core inflation average of around +3.0% (PCE+CPI), the Fed is very close to its dual mandate but is also very much watchful about the overall labor market conditions and inflations. Despite the recent cooling of the labor market, the latest retail sales data on US consumer spending is still resilient. Also, the Q2 real GDP data shows that the US economy is still growing at a solid pace, which should also support the labor market in the coming days; but as always, the Fed is watchful and prepared to do more if required; Fed is aware that there may be significant revision in the headline NFP payroll job number for 2024 even after meaningful negative revisions in the last few months.

“So I think what we're seeing is labor market conditions have cooled off by any measure, as I talked about in Jackson Hole, and but they're still at a level, the level of those conditions is pretty close to what I would call maximum employment. So you're close to mandate, maybe at mandate, on that. So, what's driving it? Payroll job creation has moved down over the last few months, and this bears watching. Meant by many other measures, the labor market has returned to or below 2019 levels, which was a very good strong labor market, but this is more sort of 2018, '17. So, the labor market bears close watching and we'll be giving it that.

But ultimately, we think, we believe, with an appropriate recalibration of our policy we can continue to see the economy growing and that will support the labor market. In the meantime, if you look at the growth in economic activity data; retail sales data that we just got, and second-quarter GDP, all of this indicates an economy that is still growing at a solid pace. So that should also support the labor market over time. So but again, we're--- it bears watching and we're watching.”

·         Despite no rising layoffs or jobless claims, the Fed wants to stay ahead of the labor market recession curve by providing recalibrated easing over time; i.e. Fed likes to provide monetary stimulus (easing) when the labor market remains strong, not after it gets weak. But the Fed will also make decisions meeting-by-meeting based on the totality of data.

“Our plan of course has been to begin to recalibrate and as you know, we're not seeing rising claims, we're not seeing rising layoffs, we're not seeing that and we're not hearing that from companies that that's something that's getting ready to happen. So we're not waiting for that, because there is-- there is thinking that the time to support the labor market is when it's strong, and not when we begin to see the layoffs. There's some lore on that. So that's the situation we're in. We have begun the cutting cycle now and we'll be watching, and that'll be one of the factors that we consider. Of course, we're going to look at the totality of the data as we make these decisions meeting by meeting.”

·         For Dec’25, Fed is projecting stalled real GDP growth at +2.0%  vs +2.1% in Dec’24 and current +3.2%; unemployment rate 4.4% vs 4.4%; current 4.2% and annual core PCE inflation 2.2% vs 2.6%; current 2.6%; i.e. Fed is projecting almost stagflation like economic scenarios for 2025 despite a cumulative -200 bps rate cuts from Sep’24 to Dec’25. Thus Powell was asked whether the Fed would front load more rate cuts in the coming days by opting for jumbo rate cuts -50 bps instead of smaller/regular/normal -25 bps every other meeting, Powell clarified that the Fed would be watchful, flexible, and also nimble; may cut faster if labor market deteriorates unexpectedly; but Fed has to also balance its dual mandate and bring inflation down to +2.0% on a durable basis. Thus Fed will maintain a restrictive rate for the time being till inflation settles around +2.0% on a sustainable basis.

“We're going to be watching all of the data, right? So if- as I mentioned in my remarks-- if the labor market slows unexpectedly; then we can react to that by cutting faster; We're also going to be looking at our other mandate, though. We are more-- we have greater confidence now that inflation is moving down to 2 percent, but at the same time, we plan that we will be at 2 percent over time. So, and policy we think is still restrictive so that should still be happening.”

·         Overall Fed is trying to achieve a soft landing by keeping the unemployment rate around 4.0% and bringing inflation back to +2.0% on a sustainable basis. Fed thinks that at present levels of labor market conditions, it will not cause any additional wage inflation spiral, while too low an unemployment rate (say around 3.5%) due to faster/rapid rate cuts may also cause deflation-like scenarios. Thus to maintain the Goldilocks nature of the US economy on a sustainable basis, the Fed has to recalibrate its policy stance carefully without any rush and cut restrictive rates gradually without seeking further deterioration of the labor market.

“So, what I would say is we don't think we need to see further loosening in labor market conditions to get inflation down to 2 percent. But we have a dual mandate, and I think you can take this whole action as a step back, what have we been trying to achieve? We're trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation. That's what we're trying to do. And I think you can take today's action as a sign of our strong commitment to achieve that goal.”

·         For a healthy labor market, the Fed primarily looks at the headline unemployment rate and judges that anything below 4.5%, say average around 4.0% is a sign of healthy/maximum employment if supported by a fairly high participation rate and reasonable wage growth coupled with normalized job/vacancy-unemployed persons and quit/layoff ratio. Fed thinks 3.5% levels of the US unemployment rate is on the lower side and 4.5% is on the higher side.

·         Thus Fed’s preferred range of longer-term sustainable unemployment rate is around +4.0% and the inflation target is +2.0% as a dual mandate (maximum employment and price stability) for a Goldilocks US economy. To judge labor market conditions, the Fed looks not only at the headline unemployment rate but also participation rate, especially for working age population, wage growths/ECI, JOLTS job openings/Quits/Layoff data, and so on; at present Fed judges US wage growth is still hot to some extent required to bring down inflation back to +2.0% on a sustainable basis.

“--So we'll start with unemployment, which is the single most important one probably, you're at 4.2 percent. That's, I know it's higher than we were used to seeing numbers in the mid and even below mid-threes last year, but if you look back over the sweep of the year, that's a low, that's a very healthy unemployment rate. And anything in the low fours is a really, is good labor market. So, that's one thing. Participation is at high levels, it's--we've had, we're right adjusted for demographics for aging. Participation is at pretty high levels; that's a good thing. Wages are still a bit above what would be their-- wage increases rather are still just a bit above where they would be over the very longer term to be consistent with 2 percent inflation, but they're very much coming down to what that sustainable level is. So we feel good about that.

Vacancies over per unemployed are back to what is still a very strong level, it's not as high as it was. That number reached 2 to 1, two vacancies for every unemployed person, as measured, it's now below, it's around one. But that's still, that's still a very good number, I would say. Quits have come back down to normal levels, I mean I could go on and on.

There are many, many employment indicators and what do they say? They say this is still a solid labor market. The question isn't the level, the question is that there has been change, particularly over the last few months and so what we say is, as the risks, the upside risks to inflation have come down, the downside risks to employment have increased and because we have been patient and held our fire on cutting while-- inflation has come down, I think we're now in a very good position to manage the risks to both of our goals.”

·         For the next meeting on 7th Nov’24, the Fed will have to take into account only one job and inflation report for September as October job and inflation report will come on 8th November and 12th November; but as always, the Fed will consider the totality of data (say 6MRA) and its implications/outlook thereof (Powell visibly fumbled to answer the question)

“You know, more data, the usual. Don't look for anything else. We'll see another labor report, we'll see another job report, I think we get a-- we might, actually we get two, we get a second jobs report on the day of the meeting, I think. Or no, no on the Friday before the meeting; So, and inflation data, we'll get all this data, we'll be watching, it's always a question of look at the incoming data and ask what are the implications of that data for the evolving outlook and the balance of risks and then go through our process and think, what's the right thing to do? Is policy where we want it to be to foster the achievement of our goals over time? So, that's what it is and that's what we'll be doing.”

·         Fed thinks that one of the primary reasons behind the recent uptick in the unemployment rate is a huge influx of migrant workers (legal/illegal) in the US; the labor force is growing much more than available job openings. Thus some policy action may be required by the Government to manage/control elevated immigration and manage the supply side of the labor force/available/prospective workers; i.e. Govt. has to take an appropriate policy/fiscal action to lower the supply/influx of immigrant workers and at the same time create more job opportunities; Fed’s monetary policy side may affect only demand side of the economy/labor market; e.g. Fed may create more job opportunities by keeping lower borrowing costs for longer and by encouraging CAPEX (Private + Government) thereof; but an appropriate Government policy is also essential to support such CAPEX/job openings.

“So, on the job creation, it depends on, it depends on the inflows, right? So, if you're having millions of people come into the labor force then, and you're creating a hundred thousand jobs, you're going to see unemployment go up. So, it depends on what's the trend underlying the volatility of people coming into the country. We understand there's been quite an influx across the borders, and that has been one of the things that's allowed the unemployment rate to rise, and the other thing is just the slower hiring rate. Which is something we also watch carefully-- So, it does depend on what's happening on the supply side.”

·         Fed is also mindful of lower job openings and subsequent higher unemployment; The Fed is also looking at the Beveridge Curve, which is still flashing no red signal, but may be very close to the flashing/warning; so far the ratio of US job openings and unemployed persons have cooled down to normal levels from very elevated levels in the last few years due to inadequate supply for labor force/immigrants amid COVID relates restrictions; but now labor force/immigrants workers are increasing due to higher population and also the higher influx of immigrant workers coming mainly from developing economies for a better standard of living and job opportunities/better pay (currency leverage). After COVID, US job openings al moved higher because of lower borrowing costs and various COVID-related job openings in healthcare and social care; but now after COVID, nominal US job openings also moving lower towards pre-COVID normal levels.

“And on the Beveridge Curve question, yes, so we all felt, on the Committee, not all but I think everyone on the Committee felt that job openings were so elevated that they could fall a long way before you hit the part of the curve where job openings turned into higher unemployment, job loss. And yes, I mean I think we are, it's hard to know that, you can't know these things with great precision, but certainly it appears that we're very close to that point, if not at it. So further declines in job openings will translate more directly into unemployment. But it's been, it's been a great ride down, I mean we've seen a lot of tightness come out of the labor market in that form without it resulting in lower employment.”

·         The Fed does not seek or encourage negative bond yield/NIRP or even ZIRP (negative or zero reverse repo rate); the Fed seeks positive real terminal neutral rates for the longer term.

“So this is a question, and you mean after we get through all of this? It's just, a great question that we just, we can only speculate about. Intuitively most, many, many people anyway, would say we're probably not going back to that era where there were trillions of dollars of sovereign bonds trading at negative rates, long-term bonds trading at negative rates.

And it looked like the neutral rate was, might even be negative, so and it was, people were issuing debt at negative rates. It seems that's so far away now, I sense that we're not going back to that. But honestly, we're going to find out. But it feels, it feels to me, that the neutral rate is probably significantly higher than it was back then. How high is it? I don't, I just don't think we know. It's, again, we only know it by its works.”

·         As always Fed is an apolitical independent central bank devoid of any political influence; the Fed goes by an economic calendar rather than an election calendar and takes decisions based on real-time economic data and implications/outlook thereof. Fed is under widespread criticism for its unexpected -50 bps cut in September, is politically motivated (just two months ahead of the US Presidential election in November; early polling already started in some states); Fed is politically neutral.

“Yeah, so this is my fourth presidential election at the Fed, and it's always the same. We're always going into this meeting in particular and asking what's the right thing to do for the people we serve. And we do that and we make a decision as a group, and then we announce it. And it's, that's always what it is, it's never about anything else. Nothing else is discussed and I would also point out that the things that we do affect economic conditions for the most part with a lag, so nonetheless, this is what we do. Our job is to support the economy on behalf of the American people. And if we get it right, this will benefit the American people significantly. So, this concentrates the mind and it's something we all take very, very seriously. We don't put up any other filters. I think if you start doing that, I don't know where you stop. And so we just don't do that.”

·         Fed’s message to the US public: The US economy is in good shape amid solid GDP growths, falling inflation towards +2.0%, and a robust labor/job market. And Fed is committed to keeping the present Goldilocks nature of the US economy by starting the present rate cut cycle, which will ensure gradual normalization of the borrowing costs over time.

“I would just say that the U.S. economy is in a good place, and our decision today is designed to keep it there. More specifically, the economy is growing at a solid pace, inflation is coming down closer to our 2 percent objective over time, and the labor market is still in solid shape, so our intention is really to maintain the strength that we currently see in the U.S. economy. And we'll do that by returning rates from their high level, which has been the purpose of which has been to get inflation under control. We're going to move those down over time to a more normal level.”

·         Till now Fed has not declared a decisive victory over inflation, but believes in approaching that goal and is now more confident (than at the last meeting in July) about reaching the +2.0% target of core inflation on a sustainable basis and encouraged by the disinflation progress made so far.

“No. We're not. So, inflation, what we say is we want inflation, the goal is to have inflation move down to 2 percent on a sustainable basis. And we're not, we're close, but we're not really at 2 percent and I think we're going to want to see it be around 2 percent and close to 2 percent for some time, but we're certainly not doing, we're not saying mission accomplished or anything like that. But I have to say though; we're encouraged by the progress that we have made.”

·         Fed is also closely watching housing/rent inflation which is quite elevated and sticky so far; in Aug’24, US rent inflation even ticked up to +5.2% from +5.1%  sequentially, while core CPI inflation stalled at +3.2%. Fed needs rent inflation around +3.0% on a sustainable basis for its +2.0% core inflation targets and from the overall trend, Powell acknowledged it may take some time (till Dec’26 or early 2027) for rent inflation to come down around +3.0% due to higher base effects in 2024-25 and the fact that most rent agreements are being renewed for multi-years rather than usual one or two year. But overall market rents are also in control.

“So, housing inflation is the one piece that is kind of dragging a bit if I can say. We know that market rents are doing what we would want them to do, which is to be moving up at relatively low levels, but they're not rolling over, the leases that are rolling over are not coming down as much and OER is coming in high, so it's been slower than we expected.

I think we now understand that it's going to take some time for those lower market rents to get into this. But the direction of travel is clear, and as long as market rents remain relatively low inflation, over time that will show up, just the time it's taking now several years rather than just one or two cycles of annual lease renewals. So that's, I think we understand that now, but I don't think the outcome is in doubt again, as long as market rents remain under control, the outcome is not as in doubt.

So I would say it's, the rest of the portfolio, or of the elements that go into core PCE inflation have behaved pretty well. They're all, they all have some volatility. We will get down to 2 percent inflation I believe and I believe that ultimately we'll get what we need to get out of the housing services piece too.”

·         Fed is expecting more activities in the housing market as the borrowing/mortgage costs will go down further gradually without affecting the Goldilocks nature of the US housing/rental market. But to deal with structurally growing demand because of higher population/higher immigrants, the Government has to take proper policy/fiscal action to take care of the supply side; the Fed alone can’t fix the housing issue in the US through monetary policy tools alone.

“The housing market, it's hard to, it's a game that-- the housing market is in part frozen because of lock-in with low rates, people don't want to sell their home. So, because they have a very low mortgage, it would be quite expensive to refinance. As rates come down, people will start to move more and that's probably beginning to happen already. But remember, when that happens you've got a seller but you've also got a new buyer in many cases.

So, it's not obvious how much additional demand that would make. I mean the real issue with housing is that we have had and are on track to continue to have, not enough housing. And so it's going to be challenging. It's hard to find, to zone lots that are in places where people want to live, it's, all of the aspects of housing are more and more difficult, and where are we going to get the supply? And this is not something that the Fed can fix.

But I think as we normalize rates you'll see the housing market normalize, and I mean ultimately by getting inflation broadly down and getting those rates normalized and getting the housing cycle normalized, that's the best thing we can do for householders, and then the supply question will have to be dealt with by the market and also by government.”

·         Fed believes that it’s not behind the unemployment curve by not cutting rates in July; but has expressed its full commitment not to fall behind the curve by cutting outsized -50 bps in September and almost committing another 50 bps by Dec’24; considering the solid US economic activities, Fed also thinks that there is no worry about hard landing even among professional economist/forecasters/business people.

“So, you're right about lags, but I would just point to the overall economy. You have an economy that is growing at a solid pace, if you look at forecasters or talk to companies, they'll say that they think 2025 should be a good year too. So, there's no sense, the U.S. economy is fine if you talk to market participants, I mean business people who are out there doing business. So, I think, I think our move is timely, I do. And as I said, you can see our 50 basis point move as a commitment to make sure that we don't fall behind.”

·         If the Fed had gotten the July job report before the July end FOMC meeting, the Fed may have started to act/cut from July. In any way, the Fed acted big in September after having two soft jobs reports for July and August along with an indication of a meaningful negative revision on NFP payroll job numbers for H1CY24. Fed has also considered July and August inflation reports along with August retail sales, Q2CY24 GDP report, and the latest Fed Beige book released in the blackout period in favor of the jumbo rate cut in Sep’24. The FOMC has unanimous support about the start of the rate cuts cycle and also has broad support for the -50 bps rate cut in Sep’24 along with projected dot-plots for the next cuts.

“So you're asking about, your second question you're asking about July. And I guess if you ask if we'd gotten the July report before the meeting, would we have cut it? We might well have. We didn't make that decision but we might well have. I think that's not, that doesn't answer the question that we ask ourselves, which is; let's look, at this meeting, we're looking back to the July employment report, the August employment report, the two CPI reports, one of which came of course during blackout, and all of the other things that I mentioned, we're looking at all of those things and we're asking ourselves what's the right, what's the policy stance we need to move to. We knew it was clear that we, clearly, literally, everyone on the Committee agreed that it was time to move. It's just how big, how fast do you go, and what do you think about the paths forward. So, this decision we made today had broad support on the Committee, and I've discussed the path ahead”.

·         Fed has no specific levels of mortgage rates in mind but expects it also to follow overall borrowing costs/interest rates fall as the Fed will gradually dial back restrictive rates towards neutral over the next two years; also overall state of the economy may influence both borrowing/mortgage costs.

“Very hard for me to say-- That's, from our standpoint, I can't speak to mortgage rates. I will say that'll depend on how the economy evolves. Our intention though is we think that our policy was appropriately restrictive, we think that it's time to begin the process of recalibrating it to a level that's more neutral, rather than restrictive. We expect that process to take some time, as you can see in the projections that we released today. And as, if things work out according to that forecast, other rates in the economy will come down as well. However, the rate at which those things happen will depend on how the economy performs. We can't see, we can't look a year ahead and know what the economy is to be doing, going to be doing”.

·         The US public is now experiencing higher prices/higher cost of living and may not have high inflation (rate of price increase) as during the last two years; price stability is now almost restored after the Fed’s hiking cycle and restrictive rate in the last two years/few months. Price stability is the ultimate and without price stability, the economy works for no one, even relatively wealthy people; also sustainable inclusive maximum employment with some real wage growth is not possible without price stability.

“Well, what I can say to the public is that we had the highest-- we had a burst of inflation, many other countries around the world had a similar burst of inflation, and when that happens part of the answer is that we raise interest rates to cool the economy off to reduce inflationary pressures. It's not something that people experience as pleasant, but in the end what you get is low inflation restored, price stability restored, and a good definition of price stability is that people in their daily decisions, are not thinking about inflation anymore.

That's where everyone wants to be is back to what's inflation, you know? Just keep it low, keep it stable. We're restoring that so what we're going through now really restores, it will benefit people over a long period. Price stability benefits everybody over a long period just because they don't have to deal with inflation. So that's what's been going on, and I think we've made real progress. I completely, we don't tell people how to think about the economy, of course, and of course, people are experiencing high prices as opposed to high inflation. And we understand that's painful.”

·         Although the Fed may have miscommunicated with the market about the quantum/size of the 1st rate cut in Sep’24, Powell emphasized that despite indication of regular/gradual smaller rate cuts of -25 bps every other meeting from Sep’24 by Fed Governor Waller and NY Fed President Williams after the August CPI and job report (just ahead of the blackout period), the FOMC has decided to cut rates by -50 bps rather than -25 bps in the larger interest of the economy and the best alternative under the current economic scenario and at the time.

“We're always going to try to do what we think is the right thing for the economy at that time. That's what we'll do. And that's what we did today.”

·         Looking ahead Fed will look into a whole array of economic data for the quantum and timing of rate cuts; the Fed will look not only at core inflation and unemployment numbers but also various other parameters of overall economic activities and labor market conditions for an appropriate policy stance; although 4.4-4.5% unemployment rate may be a red line for Fed, even if it comes by Nov’24, Fed will also look into various other economic indicators as mentioned above for a proper policy decision in the overall interest of the economy and balancing of its dual mandate.

“So we will continue to look at that broad array of labor market data, including the payroll numbers. We're not discarding those. I mean we'll certainly look at those, but we will mentally tend to adjust them based on the QCEW adjustment, which you referred to. There isn't a bright line, it will be-- the unemployment rate is very important, of course, but there isn't a single statistic or single bright line over which that thing might move that would dictate one thing or another. We'll look at, each meeting we'll look at all the data on inflation, economic activity, and the labor market and we'll make decisions about our policy stance where it needs to be to foster over the medium term our mandate goals. So I can't say we have a bright line in mind.”

·         Despite the indication of Trump pressure on the Fed to cut rates by Powell himself during the Trump 1.0 era and another allegation of White House/Biden admin influence on the Fed this time for a jumbo rate cut just ahead of the election, Powell batted for central bank independence in a free democracy for ensuring price stability and maximum employment without the interference of ruling/incumbent party; historically ruling party always seeks lower borrowing costs for higher fiscal stimulus and central bank independence ensures proper monetary policy depending on economic data/calendar, not political/election data/calendar.

“Sure, so countries that are, democracies around the world, countries that are sort of like the United States, all have what are called independent central banks. The reason is that people have found over time that insulating the central bank from direct control by political authorities avoids making monetary policy in a way that favors maybe people who are in office as opposed to people who are not in office. So, that's the idea is that I think the data are clear that countries that have independent central banks, they get lower inflation and so we're, we're not, we do our work to serve all Americans, we're not serving any politician, any political figure, any cause, any issue, nothing. It's just maximum employment and price stability on behalf of all Americans. And that's how the other central banks are set up too. It's a good institutional arrangement, which has been good for the public and I hope, and I hope and strongly believe that it will continue.”

·         Fed’s dual mandate (maximum employment and price stability) is now roughly balanced, but downside risk has increased more for the employment side rather than inflation/price stability (upside risk) unlike 2-3 years ago. Thus Fed is now focused on both rather than only inflation or unemployment rate. At present, the Fed does not seek more slack in the US labor market as it’s now not the source of inflation and thus will gradually recalibrate policy stance/rates to bring down inflation back to +2.0% targets on a sustainable basis, keeping the headline unemployment rate at least around +4.0% longer-term sustainable minimum unemployment rate around 4.0%; i.e. maximum employment 96% of the labor force.

·         Fed now has to bring down average (6MRA) core inflation (PCE+CPI) from present +3.0% to +2.0% by keeping the unemployment rate around 4.0% or even bring down to 3.5% from present levels of 4.1%. Fed does not seek further cooling of the labor market, but seeking some additional slack in the US economic activities (GDP) to further bring down core inflation back towards the targets of +2.0%; i.e. Fed is now seeking slightly additional economic slack without further deterioration of the labor market for achieving the last mile of disinflation to ensure soft landing; Fed will be not in a mad/panic rush to cut rates every meeting.

“I think and we think they are now roughly balanced. So if you go back for a long time, the risks were on inflation, we had a historically tight labor market, historically tight. There was a severe labor shortage. So very hot labor market and we had inflation way above target; so, that said to us, concentrate on inflation, concentrate on inflation.

 And we did for a while and we kept at that, that the stance that we put in place 14 months ago was a stance that was focused on bringing down inflation. Part of bringing down inflation though is cooling off the economy and a little bit cooling off the labor market. You now have a cooler labor market, in part because of our activity.

So, what that tells you is it's time to change our stance. So we did that. The change in the stance senses that we're recalibrating our policy over time to a stance that will be more neutral. And today was, I think we made a good strong start on that. I think it was the right decision, and I think it should send a signal that, that we're committed to coming up with a good outcome here.”

·         At this moment, the Fed does not see any signs of a US economic recession/ hard landing or even a meaningful slowdown. The US economy is now growing at a solid pace, while inflation is coming down without causing a significant cooling in the labor market, which is still robust and around 4.0% average unemployment rate, is at the Fed’s long-term sustainable levels of maximum employment/minimum unemployment.

 

Overall, On Wednesday, during the Q&A session, despite trying to be brave & smart, Powell’s body language indicated Fed is not apolitical and the decision to go for a crisis era like a 50 bps cut in September and most probably another similar jumbo rate cut in December too may be influenced more by White House/likely outcome of US election rather than underlying economic data & outlook.

Powell almost acknowledged that the Fed may have undergone a policy mistake by not cutting in June QTR end meeting to be ahead of the curve rather than finding itself almost behind as it’s now chasing higher unemployment rate (data) by going for panic rate cuts instead opting for normal rate cuts well in advance to find itself at the front end of the curve.

On the 12th June FOMC meeting, Fed has already job and inflation data up to May’24, which indicated US unemployment rate ticked up to 4.0% from 3.8% average in Q1CY24 and 3.6% average for 2023, which core inflation (CPI+PCE) was at +3.0% against +3.3% average for Q1CY24 and +4.4% for 2023; i.e. there was substantial disinflation, while unemployment rate ticked up further to 4.0% Fed longer-term sustainable levels (orange zone; red zone 4.5%; green zone 3.5%). Thus Fed should have started the rate cut cycle by going for -25 bps cuts every alternate FOMC meeting (QTR end) from June’24 QTR in line with real/actual economic data and outlook thereof. Usually, the Fed does consider 6MRA or even 3MRA of economic data rather than one or two months for any change of policy rates/stance.

Fed has joined the synchronized global easing late by one QTR and thus backfilled with one -50 bps rate cut to catch up with ECB:

Moreover, almost all other major G10/G4 central banks like ECB, BOE, and BOC have already begun cutting rates; ECB cuts from June’24 QTR end in line with falling core inflation and rising unemployment rate/slowing real GDP growths and cuts further in Sep’24 QTR end too (total -50 bps interbank rate), while BOE cuts once in Aug’24 by -25 bps and expected to cut again in Nov’24 after a pause in Sep’24. BOC cuts consecutive three times by -25 bps each in June, July, and September meeting with an expectation of another cut in November or Dec’24 by cumulative -100 bps in 2024. Generally, all major G4 central banks (Fed, ECB, BOE and BOC) act in sync to ensure no major policy rate differential and no major impact on FX rates, affecting both import and export in a big way. Even BOJ has already begun hiking rates to normalize and exit decades-old NIRP/ZIRP/YCC policy and the cycle of deflation.

Thus Fed has to catch up and go for the unusual/unexpected -50 bps cut in Sep’24 rather than -25 bps on the excuse about some ‘subdued’ economic data (CPI/core CPI, GDP, Retail Sales, and latest Beige book) released during Fed blackout periods. But to be frankly speaking, these data like stalled disinflation, solid US economic growth (firing almost all six cylinders) and resilient consumer spending do not favor the jumbo cut decision of -50 bps in Sep’24. Powell has himself indirectly acknowledged the fact that these data point to a US soft landing and no worry for any signal of a recession.

Also, the preliminary ‘huge’ negative revision for NFP payroll employees may be revised further (positive/negative) in early 2025 before the final release by Mar’25. Thus Powell/Fed can’t just rely on a provisional report for an important policy decision. Moreover, after the release of the above CES report on 21st August, Fed Chair Powell didn’t comment on this in his Jackson Hole symposium speech on 23rd August, while some other influential FOMC participants termed such negative revision as ‘insignificant’ compared to overall data. Also, after the release of August inflation/core CPI data on 11th September, Fed’s Williams and Waller indicated gradual normal cuts (25 bps every alternate meeting) rather than jumbo rate cuts in September and December @-50 bps each.

Powell/Fed may have decided to go for the jumbo rate cut on 18th September after being confident about no Trump 2.0 amid poor debate performance by Trump against Harris on 10th September:

Powell & Co/Fed may have changed its mind from a no 50 bps cut stance on 31st July to a 50 bps cut by 18th September after being confident about no Trump tantrum in 2025-28 amid poor debate performance of Trump against Harris 10th September 2nd Presidential debate. Previously, ‘smarter’ Trump was convincingly running much ahead of ‘senile’ Biden after the 1st Presidential debate on 28th June, in which Trump was a clear winner. On 21st July, Biden eventually withdrew his nomination in favor of VP Harris, who overcomes Trump’s approval rating around 6th August and after she debates with Trump, Harris is now clearly surging ahead of Trump’s approval rating by more than +2%.

Thus Fed/Powell may be now confident about not only disinflation but also no Trumpflation and Trump tantrums directly against Fed/Powell like we have seen in late 2019 under Trump 1.0. Unlike Trump, Biden is a much more mature politician and never made any comment against Powell/Fed directly/personally, although Biden may have also tried to influence Fed/Powell through various influential Democrat savvy market participants. Previously, Powell himself indicated autocrat/dictator like Trump’s attempt of direct interference in Fed policy meetings, affecting the age-old independence of the world’s most influential central bank.

This time Republican/GOP Presidential nominee Trump already issued a veiled warning for Powell/Fed to not indulge in abnormal jumbo rate cuts just before the election to help incumbent Biden/Harris in the election amid record-high Wall Street and public confidence on Democrats:

·         June that cuts are something they know they shouldn't be doing

·         The president should have a say in Fed decisions and Powell has gotten it wrong a lot

·         I think [Powell's] going to do something to probably help the Democrats

·         They'll do the rate cut and all the political stuff

On Wednesday, Trump said after the Fed goes for ‘panic cuts’ of -50 bps:

·         I guess it shows the economy is very bad to cut it by that much assuming that they are not just playing politics

·         One or the other, but it was a big cut-- is because the economy is not good, otherwise you wouldn't be able to do it

Biden said:

·         Inflation and interest rates are falling while the economy remains strong

·         I never met Powell in the last few years or called him

Harris said:

·         Welcome news for Americans who have borne the brunt of high prices [but] my focus is on the work ahead to keep bringing prices down

Conclusions:

Fed/Powell may have taken the jumbo rate cut decision in Sep’24 after being confident about no Trump 2.0 in the blackout period and after missing a rate cut opportunity in June-July’24:

In any way, the ‘apolitical’ Fed's credibility may be now at stake as after jawboning gradual (normal) 25 bps cuts for months, the Fed goes suddenly for -50 bps cuts just ahead of the Nov’24 election based on just one CPI/retail sales report in the blackout period which also indicated stalled disinflation and resilient consumer spending. The market may now worry about any real potential recession, which the Fed knows but the market does not know (as the Fed goes for sudden panic rate cuts).

Also, historically Fed rate cuts most of the time coincide with some types of recession/financial crisis. The world’s most important central bank Fed is now doing QT and jumbo rate cuts at the same time, which are contradictory despite the tapered pace of QT and the Fed narrative that the Fed is reducing (dialing back) overall restrictive rate in line with falling inflation.

Even if we take the US economic data at face value despite abnormal revisions even after several months, the Fed has miscommunicated with the market and also created confusion and asset bubbles by jawboning too much. Normally, the Fed never surprises the market as it has immense jawboning power and pipeline. But this time, despite a very low FFR Swap probability of -50 bps cut, the Fed goes for the same, maybe after being confident not only about disinflation & reaching price stability target of +2.0% inflation, but also no Trump 2.0, Trumpflation, and Trump tantrum. Powell may not have to face Trump again in 2025.

Now, looking ahead, the Fed may take a pause in Nov’24 due to very little economic data and may cut -50 bps in Dec’24 (Q4CY24 end) and then may shift to -25 bps normal pace of rate cuts each QTR end (every alternate meeting) in 2025 for a cumulative cut -100 bps (for 2025). And further, Fed may cut -50 bps in 2026 for an indicative terminal/neutral rate of +3.00% Compared to the Jun’24 sot-plots, Fed has front-loaded 50 bps rate cuts from 2026 into 2024 and also fully dialed back 25 bps projected rate cut in 2027 fully and projected higher longer-term neutral terminal rate at +3.00% against earlier +2.75%.

Further assuming +2.0% average core inflation (PCE+CPI); the Fed may now want to maintain a minimum real positive rate at +1.00% against pre-COVID times +0.50% and June’24 projections of +0.75%. On the high side, the Fed may also maintain a 2.50/2.00% real positive rate (as restrictive). But at the same time, the Fed will be flexible and nimble as always in line with actual economic data and outlook thereof and thus may change the goalpost again.

Although Fed may not cut again on 7th November, just days before the US election, and should wait for the next QTR end (Dec’24), considering underlying political pressure, Fed may also change its rhetorics to say that as ut5 has done a ‘policy mistake’ by not cutting in March and June QTR (after negative revisions in NFP/job data), it’s now correcting the path by going for another 25 bps cut in Nov’24 followed by another in Dec’24. Thus Fed may also cut 25 bps in Nov’24 and then another 25 bps in Dec’24 to be ahead of the ‘recession’ curve and continue the normal 25 bps rate cuts every QTR end in 2025 too.

Another point is that by Dec’24, the reverse repo rate of the ECB may be +3.25% (assuming Oct’24 pause and Dec’24 cut of -25 bps). In that scenario, the Fed may also cut only -25 bps (against a present projection of -50 bps) to maintain the spread with the ECB (cumulative cut of -75 bps by both the Fed and ECB). Also, Aug’24 core PCE inflation may tick up and the overall core disinflation process may slow down in Sep-Nov’24, while the unemployment rate may also come down below 4.0% ahead of Nov’24 election. Oil may also flare up amid growing war/conflict between Israel and Hezbollah/Lebanon/Iran just ahead of the US election along with Russia-Ukraine (Putin conspiracy?).

Bottom line:

Looking ahead, with the fading concern of Trump tantrum 2.0, Fed/Powell may go for a normal gradual rate cut pace of -25 bps every alternate meeting (each QTR end) in line with actual economic data and outlook thereof from 2025. But the Fed may go for a pause in Nov’24 and may cut either by -25 bps or even -50 bps depending upon actual economic data (unemployment and core inflation rate) and also policy action by ECB, BOE, and BOC as G4 central banks have to maintain or may want to maintain pre-COVID spreads by going for similar synchronized easing to manage FX and export/import/imported inflation equation, everything being equal.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Whatever the narrative, technically Dow Future (42200) has to sustain over 42300-42500 for any further rally to 42700/42900-43050/43250 and 43500/44000-44500/44800 in the coming days; otherwise sustaining below 42200-42000, DJ-30 may again fall to 41800/41500-41200/41000* and further 40700/40300-40100/40000* and 39700/394350-39000*/38500 in the coming days.

Similarly, NQ-100 Future (19900) has to sustain over 20150 for a further rally to 20300*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20100/20000-19900/19800, NQ-100 may again fall to 19600/19350-19100/18900 and further 18750/18550-18400/18200-17950/17600 and 17450-17300/17000 in the coming days.

Technically, SPX-500 (5720), now has to sustain over 5750 for any further rally to 5775/5805*-5850/5900 and 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5725 may again fall to 5675/5625-5600/5575*-5550/5500-5475/5450 and 5425/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 in the coming days.

Also, technically Gold (XAU/USD: 2575) has to sustain over 2605 for a further rally to 26252650-2675*/2700 in the coming days; otherwise sustaining below 2595/2590-2585/2575, may again fall to 2560*/2540-2530/2515 and 2495/2480-2470*/2425 and further 2415/2400-2390/2375 in the coming days (depending upon Fed rate cuts and Gaza/Ukraine war trajectory).