Federal Reserve Officials Signal Likely Rate Cut in September

Recent statements by Federal Reserve officials indicated that a rate cut in September is likely “a done deal,” although the magnitude of the reduction remains uncertain and data-dependent, according to Deutsche Bank economists.

Rate Cut Determined by Labor Market Data

The economists believe that the size of the rate cut at the upcoming September meeting will primarily be determined by labor market data. Deutsche Bank’s current view is that the Fed will cut rates by 25 basis points (bps) “at each of the remaining meetings this year, then a pause until 2025Q3 to gradually bring rates back down to neutral.”

Powell Hints at Future Rate Cuts

During his speech at the Jackson Hole conference last Friday, Fed Chair Jerome Powell hinted that rate cuts are anticipated, though he did not specify when or how much the cuts might be.

“The time has come for policy to adjust,” Powell stated during his keynote address at the Fed’s annual Jackson Hole retreat in Wyoming. “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.”

Market Focus on Inflation and Employment

While markets eagerly awaited clues about future monetary policy, Powell spent much of his speech reflecting on the factors that drove the inflation surge that led to 11 rate hikes between March 2022 and July 2023.

He acknowledged progress made in reducing inflation and indicated that the Fed could now focus more on maintaining full employment, another aspect of its dual mandate.

“Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic,” Powell said. “Supply constraints have normalized, and the balance of the risks to our two mandates has changed.”

He also emphasized the Fed’s commitment to ensuring both a strong labor market and continued progress on inflation, pledging that “we will do everything we can” to achieve these goals.

Current Inflation and Unemployment Rates

The speech coincides with the inflation rate’s gradual return to the Fed’s 2% target. The preferred inflation gauge most recently came in at 2.5%, down from 3.2% a year ago and a peak above 7% in June 2022.

Meanwhile, unemployment has edged up to 4.3%, typically signaling a recession. However, Powell attributed this increase to more people entering the workforce and slower hiring, rather than widespread layoffs or a weakening labor market.