August 31, 2024

     The Fed has been trying to lower inflation for over two years. It has also sought to cool an overheated job market. U.S. unemployment is up almost a full percentage point over the past year as job creation has slowed. A softer labor market, slowing income growth and shrinking savings are presenting challenges to the consumer, the primary engine of the economy. Monetary policy is tight and becoming tighter as service and goods prices moderate, while the target fed funds rate has remained on hold. Taken together, this brings the need closer to start normalizing rates from its restrictive level.

    The U.S. economy is still expanding largely thanks to consumption, albeit at a slower pace than the past couple of years. The ongoing resilience of consumer spending has eased recession fears, at least for the time being. But the consumer is facing challenges such as dwindling savings and slowing wage growth. There, are also concerns over elevated delinquency rates in credit cards, auto loans and mortgage payments. Some reprieve is on the horizon once the Fed begins its easing cycle. The rate cuts should provide relief, but it will take some time for accommodative conditions to reach households as Fed policy works with long and variable lags.

     Fed officials have signaled that they are ready to start cutting rates when they meet on September 17^th and 18^th. Price pressures are easing and apparently the job market has cooled sooner and faster than previously thought, according to preliminary revisions by the Bureau of Labor statistics released on August 21^st. Even prior to the sharp downward revision of payrolls, the minutes of the FOMC’s July meeting showed the “vast majority” of officials saw a September rate cut as likely appropriate.               

     Fed Chairman Jerome Powell, in his address at the annual Kansas City Fed economic symposium in Jackson Hole, Wyoming, confirmed the central bank is on the cusp of a key turning point in monetary policy. Powell said “time has come for policy to adjust.” Continuing, he said “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,” In his speech he also said the upside risks to inflation have diminished and the downside risks to employment have increased. His comments intensify the importance of the August employment report due on September 6^th. If the report shows marked weakening then a 50 basis point rate cut could well be in play at the September meeting, but the odds are in favor of it being 25 basis points. The financial markets are pricing in a swift move to sharply lower rates over the next year. The pace of anticipated declines may prove overly aggressive as the inflation rates remains above target, the job market still appears relatively healthy by historic measures and the money supply has shrunk little from its dramatic pandemic expansion.