The title of our Monday appointment isn’t the hit song of the summer of 2024, but the phrase uttered by Jerome Powell at the Jackson Hole symposium will linger in investors’ minds like a sweet melody for some weeks to come. In asserting that “the time has come to adjust monetary policy”, the FED Chairman made official the pivot of the world’s leading central bank, a pivot justified by falling inflation but above all (!) by the recent deterioration in the job market. Although the unemployment rate is still contained at 4.3%, weekly jobless claims are rising steadily, and the massive downward revision in job creation over the past year (-818,000, or -0.5%!) has reminded FED members of their dual mandate: inflation control and full employment. The latest release of the FED’s minutes confirms that the goal of stabilizing the labor market is now dominating the debate, with several members of the institution even calling for a rate cut as early as July. J. Powell insisted on this point during his speech: “we will do all we can to support employment”; “the current level of rates gives us significant room to maneuver in response… to the risk of further unwanted deterioration in the labor market”. An initial rate cut of 25 basis points is therefore scheduled for the FOMC meeting on September 18, but if activity deteriorates further between now and then, a 50 bp cut could be decided. The return of the “FED put”? In part: investors are now expecting four rate cuts between now and the end of the year (see this week’s chart), implying a key rate range of 4.25/4%/4,50% by the end of the year. A rate level that would still be restrictive in the current context of expected GDP growth of 1.7% in 2025 in the USA and inflation estimated at 2.3% for next year. However, beware of falling back into the excesses of late last year, when investors were anticipating up to seven rate cuts by 2024. J. Powell reminded us of the Fed’s dependence on future economic data: “We don’t yet know whether the recent favorable inflation data will continue, or the level at which core inflation will settle”. The process of rate cuts has therefore certainly begun, but it will be the forthcoming economic statistics that will determine the extent of the cuts.
While J. Powell’s speech was eagerly awaited, that of the ECB representative – in the absence of Christine Lagarde – was less so, and rightly so, given the statements made by P. Lane, the institution’s chief economist. He adopted a deliberately neutral tone, stressing both the dangers of early rate cuts (“the return of inflation to target is not yet secure”) and those of an overly restrictive monetary policy (below-target inflation and weak growth). Following his speech, investors did not alter their expectations of two further rate cuts by the ECB between now and the end of the year. It seems to us that the ECB could be more proactive on this point in the future, given the weakness of growth in the eurozone (+0.7% and +1.4% expected in 2024 and 2025 respectively), especially as the FED’s forthcoming rate cuts will give it additional room for manoeuvre in monetary policy. This week’s August inflation figures for the eurozone could provide an opportunity for the ECB to reconsider the need for an overly restrictive monetary policy.
