Powell Gives Thumb’s Up on Rate Cuts

In a suspected but highly unusual action on the part of the Federal Reserve, Chair Jerome Powell in his morning speech at the annual Jackson Hole meeting made as definite a statement on interest rates as you could expect.

“The time has come for policy to adjust,” he said. But, avoiding complete predictability, he added, “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.”

Still, it’s the green light so many in CRE and finance have waited for. Whether a quarter point or 50 basis points — so long as there isn’t an unexpected and unmitigated economic disaster suddenly appearing in data — there will be a cut in September followed by some unknown series of additional cuts.

As year-over-year inflation is now at 2.5%, as Powell said, conditions seem to be gliding down to the rare soft landing. Importantly for CRE, there was no mention of shelter, rents, or housing costs.

Now the central bank seems to be shifting its attention to the other aspect of its dual mandate, from maintaining stable prices to ensuring full employment. “It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon,” Powell said. “We do not seek or welcome further cooling in labor market conditions.”

Oxford Economics in an emailed note put it more strongly. “Our key takeaway from Federal Reserve Chair Jerome Powell’s speech at Jackson Hole is the central bank will not tolerate more weakness in the labor market,” they wrote. “This dovishness provides a fairly clear anchor for the job market and increases the chances of a more aggressive easing in monetary policy.”

Steven Blitz, managing director of global macro and chief U.S. economist at GlobalData.TS Lombard, warned that there is still economic vulnerability through the equity market. “Even for the lowest 50th percentile of households, around 15% of net worth is tied to the equity market,” he wrote. Blitz argues that pandemic money hasn’t simply disappeared because “banks are as over-deposited as ever” and that it is “fantasy to believe that this liquidity fails to turn into spending when money market rates are lowered in an economy still growing and adding jobs and real income.” That would suggest an inflationary outlook, which could then require additional adjustments of monetary policy.