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Flashing Yellow on the Economy: Powell's Shift in Focus from Inflation to Employment

September 11, 2024 |Blog

By: Michael Douramakos Partner, Portfolio Manager

During Fed Chair Powell’s latest public appearance at the Jackson Hole Symposium in late August, Mr. Powell clearly struck a dovish tone and signaled the beginning of the easing cycle in the U.S., starting at the next Federal Open Market Committee Meeting on September 18th. Although his comments were largely expected by the markets, what did change was the shift in emphasis on inflation to the state of the labour market.

This morning’s Consumer Price Index (CPI) inflation report for August was a great example of this shift in sentiment. While prices in core services less housing rose 0.3% in August to the highest level since April 2024, CPI YoY has fallen to the lowest annual inflation rate since March 2021. U.S. 2-year interest rates rose slightly by 4 bps on the back of the news, bucking the recent trend of lower yields and a steepening curve. Even considering today’s inflation data, U.S. 2-year yields have fallen 30 bps since the end of August.

As inflation is generally in line with long-term expectations, we believe the Fed is willing to sacrifice any monthly blips to ensure the national employment is strong and still moving forward. With that said, we believe it would be prudent for the Fed to start their easing cycle with a 50 bps cut next week.

Source: Bloomberg.

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