September 9, 2024

Now the only question is, “How much will short-term interest rates drop in September?”

At his annual speech to global central bankers in Jackson Hole, Wyoming, Fed Chair Powell laid out a strategy to cut short-term interest rates, but he stopped short of saying “when” or “how much.”

So, the financial markets helped him fill in the blanks to both questions. The table below suggests that the first cut will be in September. It shows that 64% of market watchers anticipate 0.25 percent. The others agree on September but see a deeper 0.5% cut. Remember, the current Fed Fund target is 5.25% to 5.5%. As the table shows, the CME Group no longer considers the 5.25% to 5.5% range possible after September!

“The time has come for policy to adjust,” Powell said in his keynote address. “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.”

Powell’s hat-tip to incoming data caught some by surprise.

Earlier in the week, the Bureau of Labor Statistics said the economy created 818,000 fewer jobs during the 12-month period ending March 2024. The BLS has been known to make adjustments to jobs data from time to time, but this was the largest change since 2009. As recently as July, the Fed indicated it’s “data dependent,” so the accuracy of the BLS report is a concern.

(Remember, the Fed has two primary jobs–maximize employment and stable prices. Will the BLS issue force the Fed to reconsider one of its key job market data sources?)

Here’s our initial reaction: The jobs adjustment may not be a big deal. However, interest rates are poised to trend lower before the election, which is a surprise to some who expected the Fed might sit tight until after November 5.

As everyone who took economics may recall, bond prices tend to increase when interest rates decrease. So change in the wind! I’ll keep you posted as I work with various professionals over the coming weeks to determine if further steps are needed.

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The Fed’s outlook is a forecast, and forecasts or forward-looking statements are based on assumptions, subject to revision without notice, and may not materialize. CNBC.com, August 23, 2024. “Fed Chair Powell indicates interest rate cuts ahead: ‘The time has come for policy to adjust’ “ FoxBusiness.com, August 21, 2024. “US economy created 818,000 fewer jobs than previously reported”