TLDR
- Powell’s speech may confirm two additional rate cuts, impacting the USD.
- Markets expect 25 basis-point rate cuts in October and December.
- Mixed Fed views on inflation and labor market risks could influence policy.
- Powell’s cautious stance could support the U.S. dollar despite rate cuts.
Federal Reserve Chair Jerome Powell is set to speak on the U.S. economic outlook and monetary policy at the NABE Annual Meeting in Philadelphia. His remarks come amid a government shutdown that has delayed key economic data releases, which may have an immediate effect on the U.S. dollar (USD). Market participants are closely watching for any confirmation of the Federal Reserve’s expected actions, including two more rate cuts this year.
Market Expectations for Further Rate Cuts
The CME FedWatch Tool currently shows a 100% probability of a 25 basis-point rate cut in October, with a nearly 90% chance of another rate reduction in December. The anticipation of these cuts has shaped market sentiment, particularly around the U.S. dollar’s performance. While Powell’s speech will not provide new economic data, his comments may offer clues on how the Fed plans to navigate the upcoming months.
Fed officials have provided a variety of views on the path forward. Governor Michael Barr expressed concern about overlooking inflation risks driven by tariffs, stating that these factors could complicate the Fed’s inflation targets. Meanwhile, other officials, such as San Francisco Fed President Mary Daly, have signaled a more dovish stance, noting that inflation has been lower than expected and cautioning that a weakening labor market could pose risks to the broader economy.
Risks to the U.S. Dollar
If Powell indicates a continued easing of monetary policy, particularly in response to a softening labor market, the U.S. dollar could face additional downward pressure. Markets are already pricing in the likelihood of two rate cuts, which typically diminish the appeal of the dollar. However, despite these expectations, the downside for the U.S. dollar appears limited in the short term, given its current positioning in global markets.
On the other hand, if Powell adopts a more cautious tone and signals hesitation in pursuing consecutive rate cuts, it could bolster the U.S. dollar. Many investors are mindful of the uncertainty surrounding key economic data releases and potential trade tensions, particularly with the ongoing risks related to U.S.-China relations. Powell’s comments may help shape expectations for how the Fed balances these uncertainties with its dual mandate of price stability and maximum employment.
Mixed Fed Signals on Economic Outlook
Recent comments from other Federal Reserve officials reflect differing views on how to address economic challenges. St. Louis Fed President Alberto Musalem raised concerns about the potential for inflation expectations to become unanchored if the Fed struggles to respond effectively to short-term fluctuations in the labor market. He emphasized that managing these risks would be key to ensuring sustained economic stability.
In contrast, Philadelphia Fed President Anna Paulson downplayed the role of tariffs in driving long-term inflation, suggesting that their impact would be more limited than some feared. Paulson also acknowledged the growing risks to the labor market but did not expect them to lead to sustained inflationary pressures. These mixed messages point to the uncertainty that Powell will likely address during his upcoming speech.
Powell’s Potential Approach to Rate Cuts
The core question for markets remains whether Powell will confirm the expected rate cuts or suggest a more cautious approach. If Powell acknowledges the possibility of further easing, particularly in response to soft labor market data, it could signal continued weakness for the U.S. dollar. However, if he highlights the ongoing risks from trade conflicts and the lack of key economic data, he may signal that the Fed will be more measured in its decisions.
At this stage, Powell’s comments will be scrutinized for any signs of how the Fed will manage the economic outlook given the uncertainties surrounding inflation and employment. The lack of key data releases due to the government shutdown only adds to the complexity of the decision-making process. As such, Powell’s speech will likely play a crucial role in shaping market expectations for the rest of the year.
