Investors increasingly speculated on how much the Federal Reserve will cut interest rates this year after Fed Chairman Jerome Powell said on Friday that it was “time for a policy adjustment.”
Powell noted that the timing and pace of rate cuts would “depend on incoming data.” However, markets quickly moved to fully price in four 0.25 percent rate cuts by the end of 2024 on Friday morning after the Fed chair said the central bank had “ample room” as its policy moved into the next phase.
“The current level of our policy rate gives us sufficient flexibility to respond to all risks we may face, including the risk of an unwelcome further deterioration in labor market conditions,” Powell said.
Stocks rallied after Powell’s speech, with the S&P 500 (^GSPC) rising 1% and the tech-heavy Nasdaq Composite (^IXIC) gaining more than 1.3%. The Dow Jones Industrial Average (^DJI) rising about 1.1%, or more than 400 points, and the interest-rate-sensitive small-cap Russell 2000 (^RUT) index soaring, rising more than 2.5%.
Neil Dutta, head of economics at Renaissance Macro, stressed in a note to clients that Powell did not use the word “gradual” in connection with rate cuts, unlike some other Fed officials have done in recent days.
This, Dutta argued, suggests that “Powell is not eliminating the possibility of major policy changes as he adjusts policy.”
The markets seem to agree.
However, with only three Fed meetings left in 2024, the question remains as to when the Fed would cut rates by 0.50% in a single meeting to meet investors’ current expectation of four rate cuts this year.
Bets that there will be a major interest rate cut in September rose slightly on Friday morning. According to the CME’s FedWatch tool, the markets are calculating a 34.5% probability that the Fed will cut interest rates by 50 basis points by the end of its September meeting. The previous day, the probability was around 24%.
Economists argue that further weakness in the labor market is likely to be the trigger for larger cuts in September. The July employment report showed the second-weakest monthly job gains since 2020 and the highest unemployment rate of 4.3% in nearly three years.
Powell addressed these developments on Friday, noting that the slowdown in the labor market was “unmistakable” and that downside risks to the central bank’s full employment mandate had increased.
“It appears unlikely that the labor market will be a source of increased inflationary pressures in the near term,” Powell said. “We do not seek or welcome a further slowdown in labor market conditions.”
Stephen Brown, deputy chief North American economist at Capital Economics, wrote in a note to clients that a weak August employment report, due to be released on Sept. 6, would likely prompt the Fed to cut interest rates by more than 25 basis points at its next meeting.
“Fed Chair Jerome Powell’s dovish tone at Jackson Hole (on Friday) and his pledge to ‘do everything in our power to support a strong labor market’ suggest that a 50 basis point cut could be on the table at the September meeting, although such a move could require a further rise in the unemployment rate in the August jobs report, which we think is unlikely,” Brown wrote.
Ryan Sweet, chief U.S. economist at Oxford Economics, agreed.
“The August employment report will determine whether the Fed cuts rates by 25 (basis points) or 50 (basis points) in September,” Sweet wrote.
The Fed’s next monetary policy decision will be announced on September 18.
Josh Schafer is a reporter at Yahoo Finance. Follow him on X @_joshschafer.
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