Market Note (Special Edition) – July 17, 2024

By Hightower Great Lakes on July 17, 2024

Powell Speaks at The Economic Club

Jerome Powell spoke this morning with David Rubenstein at the Economic Club of Washington D.C. Although coming with no market-moving comments, Powell shared insights into the Fed’s thinking regarding recent disinflation trends and U.S. economic activity, which we found insightful.

Powell began the fireside chat by stating that the U.S. economy has performed extraordinarily well over the past number of years. In the first half of 2024, the economy grew around 1.5%, and expectations are for nearly 2% growth for the full year of 2024.

Regarding the labor market, Powell thinks the market is no tighter than it was in 2019 and is in balance – noting that the 2019 labor market was very strong and that the market is no longer overheated.

On the inflation front, no progress was made in the first quarter, although progress was made in the second quarter. We have had three better readings in a row and, once averaged, they show a solid slowing pace of inflation. Powell mentioned that the three most recent readings “do add somewhat to confidence” that inflation is slowing to their 2% goal.

The Fed has a dual mandate: stable prices and maximum employment. Since inflation became a concern a couple of years ago, Powell noted it was appropriate to focus mostly on inflation.

Now that inflation has slowed, and the labor market has cooled, both mandates have come more into balance and seek equal attention. He stated that if there was an unexpected weakening in the labor market, it would be a reason for action by the Fed.

Chart 1: Inflation Cools, with Jobless Claims and the Unemployment Rate Ticking Higher[1]

No Signals on Rate Cut Timing

Powell made sure to mention that he has no intention of providing guidance to the timing of coming rate cuts. But, he did say that if the Fed waits till inflation gets all the way down to 2%, they will probably have waited too long. The level of financial tightening would still be impacting the economy at that point, likely driving inflation lower than 2%, which is not the Fed’s goal.

As of Monday afternoon, markets are pricing a 91% chance of a 25 bp cut in September, up from 62% just a month ago. By the January 2025 FOMC meeting, markets show an 85% chance that the Fed funds rate will be 50 bps lower than current levels.[2]

Powell is Happy with the Fed’s Decision-Making

Rubenstein asked Powell if they would have done anything differently in hindsight regarding their policy-making decisions. Powell said the Fed was looking at prolonged, severe downside risks, debating on a 1930s-like scenario. He stated that these risks did not materialize, partly because of their actions, and that the work they did in 2020 will stand up very well in history.

When others expected a hard landing, Powell said he always believed there was a pathway to lowering inflation to 2% without labor market pain that was seen in previous tightening cycles. He said a hard landing is not the likely scenario.

The period between the global financial crisis and the pandemic was historically unusual. With rates near zero, inflation was still relatively muted. Powell said that with rates currently around 5.3%, financial conditions feel restrictive, but not severely restrictive.

The neutral rate likely rose from where it was during the zero-interest rate policy period; thus, rates will broadly be higher going forward relative to previous cycles.

Powell’s #1 Concern

Looking forward, Powell’s biggest concern is easing too early or waiting too late to cut. Cutting too soon may undermine the progress on inflation, and cutting too late could hurt growth and expansion.

Regarding the fiscal deficit, Powell said the path we are on, large deficits with full employment and healthy growth, is not sustainable over time. He mentioned that it is not the Fed’s job to face this dilemma, and that bipartisan action is needed to solve the issue.

The Fed has four FOMC meetings left in 2024, with potential rate cuts during the September, November, and or December meetings. The Fed next meets on July 30-31 and will likely provide greater insight into their policy decisions for the back half of the year.

Click here to read last week’s Market Note (7/16).

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[1] Source: FactSet. As of July 15, 2024.

[2] Source: CME. As of July 15, 2024.