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"The time has come for policy to adjust," Federal Reserve Chair Jerome Powell told us, hinting at an impending interest rate decrease in September.
The way forward is obvious.
The market is pricing in a 25 basis point (bps) shift, but the employment data on September 6th will decide the outcome.
A 50 bps shift is still possible if the unemployment rate were to increase to 4.4% or 4.5%, which would be unacceptable for the Fed.
During his address at Jackson Hole, Chair Powell made several forceful statements. He was as forthright as possible, declaring, "The time has come for policy to adjust."
However, we still heard the standard soundbites about inflation appearing better and the emphasis now being substantially on jobs.
According to the minutes of the July FOMC meeting, which were published on Wednesday, "the vast majority [of FOMC members] observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting."
While he said only that "the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks" during the September FOMC meeting, he did not mention 25 bps or 50 bps.
Powell said, "The current policy rate level gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labour market conditions."
This does, however, hint that they might drastically lower rates if necessary.
The FOMC meeting on September 18th is priced at 33 bps, with 100 bps due by the end of the year and an additional 125 basis points due next year.
Considering the circumstances, that seems reasonable.
The core PCE deflator is due out on August 30th, and based on the data from CPI and PPI, BRN is expecting a 0.2 per cent month-on-month print before the decision on September 18th.
The employment report, considered the most important one, will be released on September 6th. Powell said, "We do not seek nor welcome further cooling in labour market conditions. "
A 50-basis-point increase seems more probable if payrolls are less than 100,000 and the unemployment rate rises to 4.4% or 4.5%.
However, BRN's base case remains a 25 bps plug.
With the unemployment rate remaining at 4.3% or falling to 4.2% and payrolls coming in at approximately 150,000, BRN confidently concludes it will be a 25 bps cut.
The core CPI follows on September 11th.
There, a monthly decrease of 0.2% seems probable; BRN's present leanings point to a possible 0.1% due to the possibility that the increase in July primary rents will reverse.
