August 29 news: Federal Reserve Governor Waller expressed support for a 25 basis point rate cut in September and anticipates continued rate cuts over the next 3 to 6 months. Governor Waller stated that unless the August US employment data significantly deteriorates and inflation is controlled, he does not advocate for a large rate cut in September.
Securities Daily reporters noted that besides Governor Waller, several other Fed officials have recently released "dovish" signals indicating potential rate cuts. For instance, New York Fed President Williams said, "it is appropriate to cut rates at the right time," suggesting the Fed could cut rates soon but did not provide a clear timeline. Similarly, San Francisco Fed President Mary Daly stated that the Fed may soon begin to cut rates to better adapt to economic conditions.
The key turning point for the Fed's signals turning "dovish" was the shift in attitude from Fed Chair Powell. At the annual economic symposium in Jackson Hole, Wyoming, on August 22, Powell hinted that despite current upside risks to inflation in the US, the Fed may still cut rates in the coming months. He also mentioned that in the short term, US inflation risks are tilted to the upside, downside risks to employment are rising, and based on changes in the economic outlook and balance of risks, an adjustment to the Fed's monetary policy stance might be needed.
Wen Bin, Chief Economist at China Minsheng Bank, told Securities Daily reporters that Powell's assessment of the labor market has shifted towards focusing on downside risks, and he explicitly stated the need to adjust the policy stance, implying that he believes short-term downside risks to US employment outweigh upside risks to inflation. Looking ahead, as Powell leans "dovish" in the short term, it is highly likely that the Fed will cut rates by 25 basis points in September. However, whether a consecutive rate cut in October occurs will depend on the August and September inflation and employment data.
According to the schedule released by the Fed, the results of the September FOMC monetary policy meeting will be announced on September 17, local time. Before that, the US August nonfarm payrolls change and August unemployment rate will be released on September 5, and the US August CPI (Consumer Price Index) data will be released on September 11.
Zhao Wei, Chief Economist at Shenwan Hongyuan Securities (000562), told Securities Daily reporters that compared to the July FOMC (Federal Open Market Committee) meeting, Powell's policy tone has shifted to "neutral-dovish." Regarding the monetary policy stance, Powell believes the Fed needs to balance "stagflation risks" (coexistence of upside inflation risks and downside employment risks), proceed cautiously, and be flexible. Because the policy rate is in restrictive territory, as the baseline outlook and balance of risks change, the Fed needs to adjust its policy stance, clearly in a loosening direction. However, the risk to whether the September Fed rate cut expectation materializes lies not in Powell's speech, but in the September 5 nonfarm payrolls report and the September 11 inflation data. The main factor determining whether the expectation for a second Fed rate cut within the year materializes remains the unemployment rate, not inflation.
On August 31, FedWatch released data showing market bets implying an 86.4% probability of a 25 basis point rate cut at the September Fed monetary policy meeting, exceeding 80% and significantly higher than one month ago (37.7%). The probability assigned to no rate cut was 13.6%.
"The 'balance' of stagflation risks is in a dynamic equilibrium; any rate cut expectation must 'allow room for flexibility'," Zhao Wei said. A September Fed rate cut has always been his baseline assumption, but the market clearly overestimates its probability. If the US unemployment rate remains low at 4.2% to 4.3% in August and inflation only rebounds weakly, the necessity for a rate cut is not high. Conversely, if US inflation rebounds beyond expectations, the Fed might not cut rates at all. If the Fed cuts rates under such "unnecessary" conditions, the probability of a December rate cut might temporarily decrease. Ultimately, as the US economy is expected to continue slowing in the fourth quarter, two rate cuts within the year remain the baseline assumption, and the possibility of two consecutive cuts cannot be ruled out.
