Fed Watch: Powell validates expectations for more rate cuts – In a speech charting the historical evolution of monetary policy at Jackson Hole, Fed Chair Powell spoke again of the challenges the Fed faces from uncertain estimates of u* (the natural rate of unemployment) and r* (the neutral rate of interest), alongside the ‘new challenge’ of fitting trade policy uncertainty into its framework. The key part of the speech for us in its implications for near-term policy was his acknowledgment that the current favourable economic outlook is (partly) explained by ‘the shifts in the anticipated path of policy [that] have eased financial conditions’. OIS forwards currently price in four further rate cuts over the coming twelve months, and this part of his speech provides tacit endorsement of such pricing. The market reaction to the speech was correspondingly muted.
All told, Powell’s speech supports our view that the Fed will cut rates 25bp at each of the three remaining FOMC meetings this year, pausing after December to assess the lagged effects of the stimulus. While consumption in the US remains solid for the time being, the manufacturing sector is weak and is likely to weaken further. Given the continued escalation of the trade war, there is little prospect manufacturing will turn around in the near future, and this will ultimately hit jobs growth and consumption. At the same time, muted inflation gives the Fed ample leeway to ease policy, given the downside risks to the outlook. See our Short Insight – Why the Fed will keep cutting, for more. (Bill Diviney)