Federal Reserve Chairman Jerome Powell used his annual Jackson Hole, Wyo., speech to make a dovish policy tilt on Friday, warning that "downside risks to employment have increased" and setting the stage for a series of rate cuts. The S&P 500 rallied in Friday stock market action after Powell delivered a 10 a.m. speech at the Kansas City Fed monetary policy symposium.
"The time has come for policy to adjust," Powell said. "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."
Powell Sees Cooler Labor Market
In his Jackson Hole speech, Powell dropped his "strong" characterization of the labor market that he used as recently as July 31. At his news conference after the latest Fed meeting, Powell said, "I would not like to see a material further cooling in the labor market."
Friday's speech took a clearer line: "We do not seek or welcome further cooling in the labor market conditions."
Powell's concern over the labor market has ratcheted up with the softening in the latest data, mostly released after the July 31 Fed meeting. The July jobs report showed that employers added a net 114,000 workers, including just 97,000 in the private sector, though the effects of Hurricane Beryl may have had a dampening effect.
Still, the softening trend is clear. Powell noted that the hiring rate — a gauge of employer demand — and the quits rate that rises when workers are confident in finding better jobs are now both below their pre-pandemic levels in 2018 and 2019.
On Wednesday, the Bureau of Labor Statistics revised jobs data in the year through March, showed 818,000 fewer hires than previously reported. That means employers added about 2.1 million workers, not 2.9 million.
Powell also highlighted the 4.3% unemployment rate, up nearly a full percentage point from its nadir in early 2023. While rising unemployment has reflected an influx of workers, not outright job loss, the jobless rate has clearly exceeded the Fed's Q4 forecast of 4%.
Fed Rate-Cut Outlook After Jackson Hole
The Fed's latest quarterly batch of economic projections released in June had penciled in two quarter-point rate cuts by the end of 2024.
With inflation risks ebbing since then and Powell now seeing higher risk of unwanted labor market cooling, financial markets are likely correct in fully pricing in at least 75 basis points in rate cuts this year. That would equate to a quarter-point move at each of the year's final three meetings.
However, the Fed may start to consider a 50-basis-point move. While Powell didn't say as much in his Jackson Hole speech, the Fed may be concerned about moving too slowly to support the labor market, since monetary policy works with a lag.
As of Friday afternoon, markets are pricing in 78% odds of a full percentage point in rate cuts this year, implying at least one 50-basis-point move. For the Sept. 18 meeting, markets currently see 40.5% odds of a half-point Fed rate cut, according to CME Group's FedWatch tool.
S&P 500
The S&P 500 finished up 1.1% on Friday. The lift from Powell's speech more than reversed Thursday's 0.9% pullback. As of Friday's close, the S&P 500 is just 0.6% below its all-time closing high on July 16, and up 18.1% for the year.
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