Baker Market Update
2024-08-23

The volatility that plagued markets in early August has mostly calmed, and with light data this week, attention has been focused on Fedspeak and minutes from the FOMC meeting in July. This morning at the Fed's annual Jackson Hole Symposium, Fed Chair Jerome Powell gave his strongest signal yet that rate cuts are on the way. “We do not seek or welcome further cooling in labor market conditions,” Powell said in prepared remarks. “The time has come for policy to adjust.”

Powell didn’t offer any details around the magnitude of the rate cuts coming next month but by virtually promising a cut is coming, he was much less ambiguous than in his press conference following the July meeting. At that time, Powell suggested the Fed needed more data to confirm that inflation was continuing to come down. His comments today suggest the Fed now has that data. Fed officials will have one more monthly jobs report, and more readings on inflation to digest before assessing the magnitude of their cut at their September 17-18 meeting.

Powell’s Jackson Hole comments come on the heels of Wednesday's release of the FOMC meeting minutes from July, which showed a "vast majority" of officials ready to cut rates in September and some policymakers even willing to cut rates at the July meeting. The minutes also noted that "many" Fed officials considered current rates to be restrictive and "a few participants" reasoned that with inflationary pressures cooling, no change in rates would mean that monetary policy would increase the drag on economic activity. The release also showed the sect of policymakers who feared a premature easing in monetary policy could restart inflation was shrinking.

The most notable data release of the week showed the U.S. economy added far fewer jobs over the last four quarters than originally reported, suggesting the labor market began moderating much sooner than originally thought. The Labor Department’s estimate for total payroll employment for Q2’23 through Q1’24 was lowered by 818,000. This means that monthly job gains during that period averaged roughly 174,000, compared to the previously reported figure of 242,000. This is one of two “benchmark” annual revisions undertaken by the department as it collects more accurate data. If the number holds through the final revision in February, it will mark the largest downward revision since the Great Financial Crisis (March of 2009). Some economists, including Bloomberg Economics, have raised concerns that recent strong job gains have been systematically overestimated for some time due to flawed adjustments for the creation and closure of businesses (Birth-Death model).

Markets have priced in a faster pace of easing from the Fed this year and see 100 bps of rate cuts by the end of 2024. With only three FOMC meetings left, that implies a 50bp cut at one of the next few meetings. Policy makers have made a point to steer investors away from a 50 bps move, touting a favored "gradual methodical approach to revisiting our policy stance over time.” (Boston Federal Reserve President Susan Collins). As of this morning, the messaging appears to be working as futures markets have priced in a 65.5% probability of a 25bp cut in September and a 34.5% probability of a 50bp cut.

Next week, is heavy on the data-front culminating with the release of the Fed’s preferred inflation gauge, PCE on Friday. Have a great weekend!