25 basis point cut priced in. Will he go further...
Tomorrow, the Fed Chair Jerome Powell is due to testify on the Semiannual Monetary Policy Report before the House Financial Services Committee. On Thursday he will take his show to the Senate where he will testify before the Senate Banking Committee. Both are due to start at 10 AM ET/1400 GMT.
The market has priced in a 25 basis point cut in the target range for the Fed Funds rate (currently at 2.25%-2.5%) at their July 31 meeting. There was some hope that the Fed might do 50 basis points, but the stronger employment report from Friday has taken any hope for that out of the equation.
The Fed chair told reporters on June 25th that "an ounce of prevention is worth a pound of cure" for the most part, telegraphing the 25 basis point cut in July.
The market will be looking for something similar to that tomrrow, despite the better than expected US jobs report from Friday.
Other recent comments from June 25th included:
- The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation
- That many FOMC participants judge that the case for somewhat more-accommodative policy has strengthened
- Fed officials are mindful that monetary policy "should not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding more uncertainty to the outlook
- The Fed was focused "on the evolving risk picture and incoming data"
At the June 19 press conference after the last FOMC decision, Powell said:
- We want to react to genuine trends, not one or two data points or swings in sentiment
- News about trade has been an important sentiment driver
- Incoming data in US has been good, especially on consumer
- Trade risks 'seem to have grown'
- Law is clear that I have a four-year term and I intend to serve it
- The support for the path we took was quite broad
- I don't think waiting too long (to cut) is prominent right now
- Inflation and inflation expectations 'dropped', we find that notable
- We need to be really strong on 2% inflation
- There was not much support for cutting rates now
- All but 1 thought it would be better to see more before cutting
- We expect to learn if these risks will weigh upon the outlook
- We don't know how credible a 4% inflation target would be
The "support for cutting rates now" comment makes you wonder if the support for cutting is really not there now, especially after the strong jobs report on Friday.
However, he kind of made is bed on June 25 when he said that "the ounce of prevention was worth the pound of cure". Absent that, and it might be a different story for tomorrow, but with it, if the Fed is on the fence, that tipped to scales to the insurance cut.
In other words, dial back that dreaded December hike which seemed good at the time but in hindsight, may not have been appropriate especially given the trade issues that have gotten worse since that time (despite the rheteric about getting those negotiations back on track).
Apart from a confirmation that it is "all systems are go" for a cut at the end of the month, the chair can continue to "walk-the-walk" and "talk-the-talk" that includes the standard:
- Risks from trade,
- Watching inflation expectations,
But will also include:
- Pats on the back for the good, solid economy with little risk for a recession.
If there is a hyper focus for the market it will be on inflation comments.
- If Powell stresses running the economy "hot" and guding inflation to >2%, that would be more dovish.
- If he takes the tack that inflation is likely to pick up naturally, and that the dips in inflation are transitory, that would be more hawkish.
