Fed Chair Powell tees up the long-awaited rate cut
Fed Chair Powell said just about everything investors wanted to hear during his Jackson Hole, Wyoming speech last Friday. In particular, investors cheered several key messages:
- Inflation is under control and, in Powell’s words, “on a sustainable path back to 2%.”
- It’s time for monetary policy to adjust—meaning a long-awaited cut in the Federal Funds Rate is widely anticipated at the Fed’s September meeting. Based on market pricing for Fed Funds futures, investors expect at least one 25 basis point cut next month – as indicated by the 1.3 number in the chart below.
- Instead of inflation, labor market conditions are now top-of-mind among Fed policymakers.
- In the wake of recent rising unemployment, further weakening in labor markets is unwelcome by the Fed—which opens the door for more rate cuts if the next round of jobs data disappoints.
Expected Number of 25 Basis Point Rate Cuts in September
Source: Bloomberg, calculations by Horizon Investments, as of August 26, 2024. Federal Funds Rate Futures estimated using Secured Overnight Financing Rate (SOFR) futures contracts. Contact us for more Information.
Stocks rose sharply following Powell’s comments. Small-caps led the way as they may stand to benefit most from lower interest rates due to their significant borrowing levels. Investors are now looking for the expected September rate cut to be the first of several reductions.
Ultimately, Powell has signaled a key shift in the Fed’s thinking: With inflation well-contained, look for Fed policy to emphasize supporting a robust labor market in the months ahead.
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