MNI FED WATCH: Still Weighing Size Of Sept Cut, Jobs In Focus
MNI (WASHINGTON) - The Federal Reserve goes into its September policy meeting still weighing how aggressively to begin its interest rate cutting cycle as officials worry about how much weaker the labor market could get in the months ahead.
Fed policymakers have left the size of the first cut since 2020 open-ended coming into the usual communications blackout period surrounding FOMC meetings, even as they make clear their intention to begin reducing borrowing costs from 23-year highs.
Governor Chris Waller, who had the last word last Friday before the communications blackout, said he was openminded about the size and pace of cuts.
"If the data supports cuts at consecutive meetings, then I believe it will be appropriate to cut at consecutive meetings. If the data suggests the need for larger cuts, then I will support that as well," he said. "I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate."
New York Fed President and FOMC Vice Chair John Williams said earlier that day "the stance of monetary policy can be moved to a more neutral setting over time depending on the evolution of the data, the outlook, and the risks to achieving our objectives."
'GENUINELY UNCERTAIN'
One or more 50 basis point cuts could be in play as policymakers weigh the risks of a material deterioration in employment, William English, former director of the Fed Board's division of monetary affairs, told MNI. "It's the first meeting in a long time that is genuinely uncertain."
Depending on the balance of risks to the outlook, individual views on easing this year could range from a quarter point per meeting to half-point moves in two out of the three meetings left, English said.
Determining the appropriate pace at which to reduce policy restrictiveness will be challenging, Powell said at Jackson Hole. Slower steps may be "putting the labor market at risk" while cutting faster "means a greater likelihood of achieving a soft landing" but at the risk of overshooting neutral and cause policy to loosen too much. (See: MNI INTERVIEW: Balanced Risks Call For Gradual Cuts -Lockhart)
Cooling growth, jobs and inflation are driving the Fed's confidence rates can be trimmed by 100 bps or more without reigniting price pressures. Trend inflation is expected to move below 2.5% by year-end, and while shelter inflation has proven stickier than expected, officials may be inclined to look through a lone outlier category if the rest of the basket has fallen back in line. (See: MNI POLICY: Fed Increasingly Convinced It Defeated Inflation)
Since summer, the extent of job market deterioration has taken over as the top focus within the FOMC. Unemployment has inched steadily higher to 4.2% in August from 3.7% at the start of the year and a massive revision from the Bureau of Labor Statistics showed the economy had created 818,000 fewer jobs in the year through March than previously estimated.