In his address at the Fed’s economic symposium last week, Federal Reserve Chairman Powell declared victory in the Fed’s four-year effort to reduce inflation and cool an overheated labor market, ‘the worst of the pandemic-related economic distortions’. Powell’s delivery was relaxed and much of the ‘Fedspeak’ was absent, a clear departure for a man accustomed to scrutiny by presidents, congress, markets, and the media.
Powell’s headline statement: ‘The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.’ Note this rare instance of clarity in Fed policy. And if Powell’s Fed has engineered the first economic ‘soft landing’ (using policy rate to reduce inflation and tight labor without the customary dip into recession), his methods should be studied.
Traders are pricing a full percentage point cut by year-end, spread over the FOMC’s next three policy meetings. This suggests two 0.25% cuts and one 0.50% cut.
The U.S. Dollar Index is +0.11% today, rebounding into positive territory after touching a 13-month low at 100.534. The dollar’s 0.86% gain vs. the Mexican peso leads all currency moves, as the popular carry trade continues to unwind.
U.S. Treasury yields are little changed from Friday. Gold continues to trade near historic highs, consolidating recent gains before a likely move higher.
This week’s economic calendar features Friday’s PCE Price Index (Fed’s preferred reading on inflation) results for July.
