Labor market will determine size of September Fed rate cuts: Deutsche Bank By Investing.com

Recent statements by Federal Reserve officials have signaled that a rate cut in September is likely “a done deal,” although the extent of the cut remains uncertain and data-dependent, Deutsche Bank economists said Monday.

They believe the size of the rate cut at the next meeting in September will be determined primarily by labor market data. The 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 pause until the 25th quarter to gradually return rates to neutral.”

During his speech at the Jackson Hole conference last Friday, Fed Chairman Jerome Powell suggested that rate cuts are on the horizon, although he did not specify when or how much the cuts might be.

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

As markets eagerly awaited clues about the future direction of monetary policy, Powell devoted much of his speech to reflecting on the factors driving inflation, which has led to 11 rate hikes between March 2022 and July 2023.

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

“Inflation has dropped significantly. The labor market is no longer overheated and conditions are now less stringent than they were before the pandemic,” Powell said. “Supply constraints have normalized. And the balance of risks for our two mandates has changed.”

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

The speech comes as the inflation rate gradually returns to the Fed’s 2% target. The latest preferred gauge of inflation was 2.5%, down from 3.2% a year ago and a peak of more than 7% in June 2022.

Meanwhile, unemployment rose as high as 4.3 percent, typically signaling a recession, although Powell attributed the increase to more people entering the workforce and slower hiring, rather than widespread layoffs or slackening the labor market.