WHAT HAS CHANGED IN THE US MONETARY POLICY STORY?
When the Fed announced the unemployment data for July at 4.3%, it had set off alarm bells. There were concerns that the US may be actually staring at a hard landing of the economy. For the last 2 years, since the rate cuts had started, there had been persistent fears that too much of monetary tightness would eventually lead to a slowdown in growth. Not only did the July unemployment touch 4.3%, but even the US GDP growth for Q1-2024 had fallen to a low of 1.3%. That led to the US cutting rates by a surprising 50 bps in the September policy and following it up with another 25 bps rate cut in the November policy. The Fed actually surprised the street by being more dovish than it was expected to be. However, there has been a subtle shift in the recent weeks.
For starters, the unemployment figure, which had soared to 4.3%, has since settled at a more moderate 4.1% with non-farm payroll additions also being robust. In addition, the second quarter final estimate came in much better at 3.0% and the first advance estimate for the Q3-2024 GDP had come in at 2.8%. Now, it looks like Q1 was more of an exception or aberration than the rule. The big question is whether the Fed will continue its aggressive rate cuts when it knows that the hard landing is not exactly a concern now? That issue was addressed in elaborate detail by the Fed Chair Jerome Powell. Addressing the World Affairs Council of the Federal Reserve Bank of Dallas; Powell outlined how the Fed reads the data and how the Fed may still prefer to front-end rate cuts in 2024, although 2025 may be a different story altogether. Here is a gist of what Powell said on economic outlook.
10 THINGS THAT POWELL SAID IN HIS SPEECH
In his speech at the World Affairs Council of the Federal Reserve bank of Dallas, Powell dwelt at length on macro data, concerns of hard landing, inflation narrative, and outlook for future monetary policy. Here are some key takeaways.
Clearly, the Fed may be justified in patting itself in the back for a job well done. There is clarity on 2024 monetary policy stance, but not so much about monetary policy in 2025.
POWELL EXPECTS NEUTRAL POLICY SETTING IN 2025
As Jerome Powell himself admitted in his speech; once the front-loading of rate cuts of 100 bps was done in 2024, it was very likely that the Fed would move towards a more neutral stance to its policy. Having said that, Powell or the FOMC has not committed to any pre-set path for rates; other than saying that it would be driven by data and data alone. In assessing data points, the Fed would stick to its twin objectives of price stability and full employment (defined as 3.5% unemployment). Any other objective would be subservient to these two objectives of monetary policy.
Powell acknowledges that the triggers for US monetary policy will not only come from within but also from outside. Fed cannot be immune to what other major central banks in the world are doing. Also, energy continues to be a key driver of inflation in the US and across the world and that has been an X-factor. In addition, the crisis in West Asia could only worsen the supply chain constraints and that could impose an additional cost in terms of core inflation. But, apart from these factors, there are political challenges too.
Trump and Powell have not been on the best of terms and Trump has not been a great supporter of using rates to drive growth. One thing is certain; we will live in interesting times in the next few months.
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