Financial News for the Week of August 23rd, 2024

It was a quiet week on the economic data calendar, but there was plenty of Fed communication for market participants to digest. The headliner was Fed Chair Powell’s speech at the annual Jackson Hole Symposium, where the Chairman signaled a clear desire for the FOMC to begin reducing its policy rate at its next meeting in September. The news hardly came as a surprise, particularly coming after the release of the July 30-31 FOMC minutes, which indicated that the “vast majority of participants” supported cutting rates at the next meeting. Though equity markets see-sawed through most of the week, a clear commitment from Powell that the Fed will soon start loosening its policy stance helped to fuel a late-week rally, with the S&P 500 looking to end the week up 1.3%. Bond yields across the curve were lower by 10-15 basis-points (bps) on the week, with the 10-year Treasury sitting at 3.8% at the time of writing.

Two years ago, Chair Powell delivered a very somber message during his speech at Jackson Hole, stating the Federal Reserve will do “whatever it takes to restore price stability” even if that meant “inflicting some economic pain” in financial news. At the time, inflation was sitting at a multi-decade high while the labor market had tightened to a degree not seen in recent history. It had become obvious that policymakers had fallen well behind the curve and were scrambling to play catch-up. While many feared that the FOMC’s swift actions of quickly raising the policy rate (Chart 1) risked overtightening and potentially tipping the economy into a recession, the downturn never materialized.

During his speech Friday morning, Chair Powell acknowledged the progress the Fed has made over the past two years, specifically noting that the upside risks to inflation have diminished while the downside risks to employment have increased. While Powell offered nothing in terms of the speed of adjustment, other policymakers speaking this week highlighted the importance of a “gradual” and “methodical” approach to loosening policy, which supports a 25 basis point cut in September. However, Powell also emphasized that the FOMC “does not seek or welcome any further cooling in the labor market”, which suggests the next several employment reports will be critical in determining the future path of the policy rate.

Fears of a further cooling in the labor market aren’t completely unfounded. Earlier this week, the BLS released its preliminary annual benchmark revisions for non-farm employment, which showed that payrolls were 818 thousand less over the twelve-month period ending in March 2024 – the largest downward adjustment since 2009. This implies that job gains likely averaged closer to 174 thousand per-month over the reference period, as opposed to the 242 thousand currently reported (Chart 2).
Even after incorporating the revisions, there’s nothing yet to suggest that the labor market has overcorrected. This is why we feel that the FOMC is likely to opt for a more gradual approach in the beginning. However, it is clear that policymakers have become hypervigilant of the labor market and any further signs of cooling is likely to bring a more aggressive path for rate cuts.

Thomas Feltmate Director & Senior Economist  | 416-944-5730