On Friday, Federal Reserve Chairman Jerome Powell delivered a speech at the annual Jackson Hole symposium, providing insights into the central bank's approach to future interest rate cuts. In his address, Powell emphasized that the Federal Reserve's decisions on the timing and magnitude of rate adjustments would be guided by incoming economic data, the evolving economic outlook, and the balance of risks.
Strategists from Evercore ISI interpreted Powell's remarks as aligning with expectations of a sequence of 25 basis point reductions. However, Powell's use of the term "pace" was seen as leaving the door open for potentially larger cuts, exceeding 25 basis points per meeting, if warranted by the economic indicators, particularly those related to the labor market.
The Fed Chair's comments suggested that the Federal Reserve is prepared to make more aggressive moves, such as 50 basis point cuts, if necessary to preempt a worsening balance of risks, especially with respect to employment. Powell maintained a positive outlook, suggesting that with the right policy adjustments, the economy could return to a 2 percent inflation rate while sustaining a strong labor market.
Evercore ISI analysts noted that Powell's speech committed the Federal Reserve to a proactive risk management strategy. This approach is viewed as reducing risks to the broader economic outlook and is considered favorable for market sentiment. Powell's speech did not specify the exact size of the upcoming rate cuts but indicated a readiness to respond flexibly to changing economic conditions.
In other recent news, Goldman Sachs has revised its U.S. recession probability to 25%, while JPMorgan predicts a 35% chance of a recession beginning before the end of the year. This follows disappointing U.S. jobs data, with the unemployment rate rising to 4.3% in July. Despite these concerns, Goldman Sachs forecasts a series of 25 basis point reductions in the federal funds rate for the remainder of the year, beginning in September. This adjustment in outlook comes after July's employment report fell short of market expectations.
Similarly, Evercore and BofA Global Research predict the Federal Reserve will implement interest rate cuts as early as September, with Evercore suggesting a more aggressive approach of three rate cuts. These forecasts follow a report from the U.S. Labor Department showing weaker-than-expected July payroll numbers. The economy added only 114,000 jobs in July, falling short of the anticipated 175,000 and pushing the unemployment rate up from 4.1% to 4.3%.
In the midst of these developments, investors betting against market volatility experienced significant losses due to a global stock selloff. The CBOE VIX index, which measures market volatility expectations, saw its largest intraday rise on Monday, erasing $4.1 billion in returns from ten major short-volatility exchange-traded funds.
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