Fed Hawks "Backtrack"! Inclined to Cut Rates Multiple Times This Year

Atlanta Fed President Bostic said that more than one rate cut may be needed by the end of the year, as he changed his view following data showing declining inflation and a slowing job market.

Bostic said in an interview at Jackson Hole, "An early rate cut may be appropriate." When asked if he supports more than one rate cut this year, he said, "It's possible."

Bostic noted that the slowdown in inflation exceeded his expectations. He said, "You can't ignore the data, and the data suggest that a bias towards cutting rates is appropriate."

Regarding future interest rates, Bostic made some rebuttals, twice stating that he would like to see "a few" or "a couple of months" of data. Of course, there won't be "a couple of months" of data before the September FOMC meeting. As a Fed hawk, Bostic's rebuttals were not surprising, but with the market pricing in a 26% probability of a 50 basis point rate cut in September, his rebuttals still convey a hawkish message.

He mentioned that the potential range of Fed decisions includes a variety of choices from no rate cut to a 50 basis point cut, with the long-term federal funds rate expected to be 3%.

Previously, at the African American Financial Professionals Conference in Atlanta, Bostic stated, "If we start cutting rates and then have to raise them again, that would be very bad," and he needs to see "more data" to support a rate cut.

The shift in stance by this hawkish voting member has provided the market with a sense of reassurance at this critical moment.

The bond market has once again accumulated significant bets, expecting the Fed to implement a broad easing cycle over the next 12 months. However, expecting clarity on how Powell will kick off this process at the meeting on September 17-18 may be unlikely, especially with August employment data set to be released early next month.

Kathy Jones, Chief Fixed Income Strategist at Schwab, said, "Investors are hoping to hear a strong signal about a rate cut next month, but I don't think Powell will ever commit in advance, nor will he outline a complete cycle, as that would be too much for him. He is too cautious."

For those watching Powell closely, the core issue is whether another weak jobs report will open the door for a 50 basis point rate cut in September, or force the Fed to adopt a more aggressive rate cut strategy in the coming months.

Traders have reduced bets on a large rate cut in September, expecting a cut of around 30 basis points next month.

Neil Sutherland, Portfolio Manager at Schroder Investment Management, said, "A rate cut in September is pretty much a done deal, it's just a debate about whether it will be 25 basis points or 50 basis points. Labor market data in the next month or two will provide us with more clarity." Traders are expected to cut rates by a total of 96 basis points at the remaining three Federal Reserve meetings in 2024. This means that at one of these three meetings, there may be a 50 basis point rate cut.

Ian Lyngen, the rate strategist at BMO Capital Markets, said: "This can be interpreted as a 25 basis point rate cut at each meeting under normal circumstances, and if the unemployment rate suddenly rises or core inflation unexpectedly falls, there may be a 'precautionary' rate cut."