One could say that Powell has laid some groundwork for a predicted interest rate cut in September. However, the market doesn’t display extreme euphoria because post-holiday reduction in the cost of money is largely priced in. The Wall Street stock market was growing all day yesterday, resulting in a 2.6% increase in the Nasdaq Composite and a 1.6% increase in SP500. The industrial Dow Jones performed worse, ending the day with a cosmetically positive result of 0.2%. The dollar lost value, although it’s quite hard to notice its depreciation in EUR/USD observations. However, the yields on American government bonds fell decidedly across the entire yield curve.
The Federal Reserve kept interest rates unchanged at a level of 5.25 – 5.5%. Jerome Powell signaled a possible cut as early as September. The committee highlighted the risk for both sides of its double mandate. It was noted that in recent months further progress has been made towards a 2% inflation target. It was assessed that the risk for achieving employment and inflation objectives is still moving towards a better balance. As a result, the market has become even more convinced that September will witness the start of an easing cycle in monetary policy.
Powell emphasized the need to balance the Fed’s dual mandate: inflation and employment. He stated that the risk of unexpected price increases has dropped, while the risk of worsening situation in job market is now real. The latest employment data for July will be released tomorrow and in this context, they become even more important. Predictions indicate a further cooling down situation suggesting a consensus employment change in the non-agricultural sector below 200 thousand. Yesterday’s ADP report followed a trend of weakening job market in the US. The reading of 122 thousand was worse than the forecast, which revolved around 155 thousand. Yesterday we also learned about the employment cost index, which rose by 0.9% q/q, which is a slower pace than before and the result was weaker than expected. Today we will learn about ISM for industry and also the weekly number of applications for unemployment benefits.
Returning to the press conference itself, Powell admitted that an interest rate cut was discussed at a July meeting. This is a clear change as previously it was explained that it was too early for such a move. When asked about the possibility of a 50 basis point move down in September, he replied that such a large change was not currently plausible. Between the lines, it could be assumed that September is almost certain, but the chairman did not want to directly confirm this, responding somewhat evasively that the next decision will largely depend on the overall data and not on one or two individual readings.
Łukasz Zembik, Oanda TMS Brokers
Source: https://ceo.com.pl/powell-otwiera-drzwi-do-obnizek-wall-street-reaguje-euforia-29111
