IS THE US FED READY TO CUT RATES IN SEPTEMBER MEET?
Between now and the September Fed meet, there are several data points to contend with. There will be the consumer inflation for July and August and the PCE inflation for July. More importantly, there will be the Jackson Hole symposium between August 22nds and August 24ths, coming up later this month. The Jackson Hole Symposium is a select gathering of leading central bankers in the world, especially the key central banks like the ECB, BOE and the Bank of Japan. Apart from the central bankers, leading academicians and policymakers are also invited to the symposium. The significance of the Jacson Hole Symposium is that it offers a platform to debate on the outlook for monetary policy and ways and means to ensure that central bank monetary policy is convergent.
Quite often, the bigger picture becomes evident at the Jackson Hole Symposium wherein the differences in the approach to monetary policy come out quite clearly. The idea of synchronizing monetary policy is to reduce the shocks in the global financial markets. A classic example is the decision of the Bank of Japan to turn hawkish at a time when the world was shifting towards a more dovish tone. The sudden divergence led to the abrupt unwinding of yen carry trades, creating tumult in global financial markets in a big away. The outcome of the talks at the Jackson Hole symposium will have a critical bearing on how the Fed conducts its monetary policy. However, one indication that is coming out is that the Fed may not rush into a rate cut in September and would be a lot more cautious. That was revealed in a recent speech delivered by Michelle Bowman.
HOW MICHELLE BOWMAN SEES THE MONETARY POLICY OUTLOOK
Speaking at the Senior Management Summit at the Kansas Bankers Association; Fed governor Michelle Bowman underlined that while inflation had been tapering, the Fed may have to ideally wait till the end of the year for its first rate cut. This is in stark contrast to the general view of the CME Fedwatch that the Fed may take up 3 rate cuts in 2024 itself and add another 5 rate cuts in 2025. That may be too aggressive, as per Michelle Bowman. Here is what Michelle Bowman underlined in her recent speech.
In short, inflation is coming down, but not to the extent and not with the conviction that the Fed would have anticipated. The last mile was proving much harder than imagined. Let us now turn to 3 other supportive factors that go into the rate cut decision.
GDP GROWTH, CONSUMPTION, LABOUR – THE TROIKA EFFECT
When the Fed takes the rate cut decision or otherwise, the primary consideration is the inflation. However, that is not the only factor. The Fed also tries to find out if the other macros are supportive. For instance, if inflation is falling but wages are still too high, then the inflation was bound to bounce back to higher levels. Similarly, growth and consumption continued to be robust, then low inflation would be tough to sustain. Here is what Michelle Bowman thinks about these 3 key variables.
With the inflation showing falling traction and the data on economic activity, labour and consumer spending also turning supportive, will the Fed go for a rate cut in September?
DOES MICHELLE BOWMAN SEE A RATE CUT IN SEPTEMBER 2024?
Michelle Bowman has been one of the hardest hawks of the FOMC. However, now, even Bowman feels that the baseline outlook for inflation may be changing to a more dovish note. However, the incoming data should consistently point to inflation moving sustainably toward the 2% goal. Having said that, Bowman suggests it would be better to be patient and data driven, rather than give into time bound targets for rate cuts. Here is why Bowman still remains cautious despite the positive triggers from the key data points.
So, how do all these data points and news flows highlighted by Michelle Bowman impact the rates trajectory of the US Fed?
HOW THE US FED IS LIKELY TO ACT ON RATES?
Bowman has underlined that there cannot be discrete answers to such a complex and multivariate problem. There could be a range of possible scenarios that could unfold when assessing how the FOMC’s monetary policy decisions may evolve; starting from September 2024. Fed has again underlined that it would be solely and largely be guided only by the incoming data flows. According to Bowman, even equity prices have been volatile of late, but are still higher than at the end of last year.
According to Bowman, inflation is still a little elevated and the upside risks to inflation also cannot be ignored. The Fed is likely to focus predominantly on the price stability aspect while taking its final decision on rates. Bowman feels that restoring price stability is the key to long term real growth in the US. And if that means rate cuts have to wait, then the rate cuts will have to actually wait till the end of 2024. In that case, September rate cut may be relatively optimistic.
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