Powell Says the “Time Has Come” for Rate Cuts

Rates plummet as Powell backs monetary easing. Swap rates declined 3-9bps across a steepening curve after Chair Powell indicated today that rate cuts should be set to commence in September. The policy-sensitive 2-year Treasury yield fell over 9bps to 3.91% as markets have honed in on either a 25bp or 50bp initial rate cut. Equities soared on the dovish outlook, with the S&P 500, DJIA, and NASDAQ all up over 1.10% today.

Jackson Hole speech offers strong signs of imminent Fed policy shift. Chair Powell said at his Jackson Hole speech today that “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” He offered further hints of a near-term rate cut by adding, “My confidence has grown that inflation is on a sustainable path back to 2%.” He also emphasized that “The upside risks to inflation have diminished…and the downside risks to employment have increased,” and that the Fed does “…not seek or welcome further cooling in labor market conditions.” Still, he offered encouraging words about achieving a soft landing, saying, “While the task is not complete, we have made a good deal of progress toward that outcome.”

Inflation and GDP figures await. Next week’s personal consumption expenditures (PCE) price index data is expected to show rising price growth in July. Core PCE is expected to rise 0.1% to 2.7% on an annualized basis and stay flat at 0.2% month-over-month. While not ideal, a slight increase in year-over-year inflation may not have a large impact on Fed policy outlook given their renewed focus on maximizing employment. Meanwhile, next Thursday’s revised 2Q24 GDP growth data is expected to remain in-line with the original 2.8% estimate, roughly double 1Q24 growth of 1.4% but still below levels during the back-half of 2023.