The Fed Just Strongly Signaled A September Rate Cut | Axel Merk

Is that wise?

In its latest guidance released this week, the Federal Reserve is holding interest rates steady for now.

The Federal Funds rate will remain unchanged at 5.25%.

And the current pace of Quantitative Tighetening (QT) will continue, unchanged.

But Fed Chair Jerome Powell did his best to prepare the market that a rate cut may indeed be “on the table” for September. To be ultimately determined by the totality of the data at that time, of course.

Is that wise?

Are these the appropriate conditions to start cutting rates?

To find out, I sat down right after Fed Chair Jerome Powell's press conference with fund manager & Fed watcher Axel Merk to get his real-time assessment.

Premium members of this Substack got to watch this discussion live yesterday and ask Q&A.

The replay is now available to all, which you can watch by clicking here or on the image below:

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Adam’s Notes: Jerome Powell Press Conference (recorded 8.1.24)

Given the time-pressures to produce & edit yesterday’s real-time event, I’m breaking from the traditional Adam’s Notes format and instead sharing my bullet-point notes of Jerome Powell’s press conference. I hope you find them useful.

PREPARED REMARKS

• Economy has made "considerable progress" over past 2 years in moving towards the Fed's targets for its dual mandate

  • Labor market has come into better balance &. unemployment rate remains low

  • Inflation has come down from 7% to 2.5%

• Inflation target remains 2% and Fed will keep at it until goal is reached

• FOMC decided to leave FFR unchanged at 5.25-5.5% & continue to reduce balance sheet

• Economic indicators continuing to expand at solid rate 

  • H1 GDP grew at 2.1% (though slowing YoY)

  • H1 PDFP grew at 2.6%

  • Consumer spending slowing but still "solid"

  • CAPEX picking up

  • Housing investment stalling

• Labor market has come into "better balance", unemployment remains low at 4.1%

  • Jobs-to-workers gap is near 2019

  • Wage growth slowing

• Inflation expectations are "well anchored"

• Fed attentive to risks on both sides of dual mandate [Powell really trying to emphasize that he's been prioritizing inflation over jobs until now, and will give both equal weight going forward]

• Fed becoming "more confident" it's going to reach its 2% inflation target

• But Fed will be data-driven

  • Willing to stay high(er) for longer if inflation proves stubborn

  • Also, willing cut sooner/more aggressively if inflation comes down fast and/or labor market shows weakness

  • "We are prepared to respond"

• [Usual concluding talk about how the Fed is all about helping out the little guy...]

PRESS Q&A

• NYT: Is Sept a reasonable date to expect a rate cut? And if "yes", why not just make it today?

  • We'll let the data decide about Sept. It's not there yet. But a rate cut "could be on the table" soon.

• If inflation behaves as expected between now and Sept, is a Sep rate cut the Fed's baseline expectation?

  • JP not willing to be pinned down. Again, the "totality of the data" is going to decide for us.

• In what ways are you not confident that inflation is not headed back to 2%?

  • We like where the data is trending. We just want to see more good data come in before we cut.

  • Can see anything from zero cuts to several cuts ahead

• WSJ: Since the labor market has normalized, why keep restrictive policy in place and risk creating more unemployment?

  • We're watching labor market "quite closely" and so far the normalization rate looks OK. But if we start seeing data that concerns us, we'll react.

  • JP doesn't see the labor market as a future source of inflationary pressures.

• AP: Would you consider pre-emptive cuts if the labor market starts cooling faster than you want?

  • JP: "I feel like we"re in a good place"

• AP: The recent JOLTS report show that hires are below 2019 levels. But firings are muted, too. Is this sustainable?

  • Likes the data he's seeing = healthy normalizing

• CNBC: Are you planning on "normalizing" rate cuts? ( = MANY rate cuts,  not just a few)

  • Our goals is "how do we keep the current goldlilocks conditions going?"

  • The pace of future rate cuts will depend on the future condition of the economy, which is highly uncertain

• WP: Is disinflation "back on track"?

  • JP: yes, even better than what we saw last year. Everything is disinflating now, even housing

  • Fed looks at 12-mo CPI, which is currently 2.5% headline, 2.6% core

• Bloomberg: What's the greater risk to the American people: re-stoking inflation by cutting too soon, or injuring the jobs market with high rates?

  • Almost even now, though inflation maybe slightly father from our goal still

  • The time is coming when we have to start dialing back restrictive policies

• FOX Business: Could the heavy government hiring be masking a weaker jobs market than many realize? Could the Fed be behind the curve on the labor market?

  • We look at everything. We balance all the risks. We look at the differences between govt and private sector jobs. It's a difficult judgment call.

  • FMOC did discuss this issue today. We do think we're getting close to the point where we have to become less restrictive. But today's decision to hold steady was unanimous.

• Axios: Status of the Lag Effect?

  • JP: It's real, and we've started to see the lags arrive over the past few months

  • Interest-sensitive spending is clearly showing it

  • Expect to see more of it arrive

  • Yes, we worry that any rate cuts we make in regards to labor market weakness may take a long time to have any effect. But the economy and labor markets are doing fine right now, so no immediate worries.

• Politico: How worried are you about unemployment rising fast enough to trigger the Sahm Rule?

  • We're watching the labor market carefully

  • FYI: the Sahm Rule is more of a guideline, not a law of the universe. Traditional indicators that many worry about, like the inverted yield curve, haven't mattered (yet)

  • Labor market is normalizing, but currently appears to be in good shape

• Bloomberg: Lots of alternative data shows that the economy is cooling faster than the headline data says. Do you look at that?

  • JP: we look at everything. And we talk to CEOs, who should have the best view on the ground. They're not worried, on average.

• CBS News: Would a September rate cut be seen as a politically-influenced act?

  • Fed hasn't made any decision about Sep

  • We are independent, not political. We'll do what we think we need to do, when we need to do it, to accomplish our mandate.

  • We are non-political at all times. Never do we do anything to support any particular politician or party.

  • Our models do not take into account the economic plans of either candidate.

• Barrons: Fed votes have been unanimous for a long time. Do you expect more dissent as you move to cut?

  • Maybe. Dissents happen.

• MNI Market News: Is a 50bp cut as a first cut a possibility?

  • We're not thinking about that right now

• Yahoo! Finance: Can you provide more color to this recent FOMC's discussion about whether to cut in July?

  • There was a healthy debate, but everyone support today's unanimous vote

  • There's a growing sense of confidence we could be in a position to cut in Sep

• Marketplace: Bill Dudley wrote an op-ed that the Fed should cut rates now. Is he wrong?

  • JP: Saw that. This is where judgement comes into play. We have all the data. It tells us to keep waiting (for now) before cutting.

  • Chances of a "hard landing" for the economy are "low".

• What is the Fed's reaction function for determining how far & fast the Fed will cut rates from here?

  • JP: I don't think giving forward guidance is useful b/c the data changes so much

• Any update on a potential CBDC?

  • The FOMC doesn't talk about this at all. Nothing new going on. We don't have authority to make one . But we're watching and following.

  • We'd need to ask Congress for authority and we don't yet know if we think a CBDC is a good idea.

  • Digital Finance is revolutionizing payments globally

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