Wall Street almost flat on suspense of an early Fed pivot

·         Also lingering uncertainty about Gaza war ceasefire and US election outcome affecting risk trade ahead of Powell’s Jackson Hole comments

·         Latest FOMC minutes and Fed talks indicate Fed may continue wait & watch in Sep’24, if August core inflation and employment data does not cool down as being expected

On Tuesday, Wall Street Futures snapped 8-day winning streaks amid lingering uncertainty about Gaza war ceasefire, hopes & hypes of an early Fed pivot and Democrat Presidential candidate Harris’ plan to hike corporate tax back to 28% (with various tax deductions options). At present, US Democratic Presidential Candidate Harris is leading Trump for the Nov’24 election contrary to just a few weeks ago, when Biden was in race. Harris has recently unveiled her economic and social plan as she campaigns for the 2024 U.S. presidential election. Her agenda focuses on increasing corporate tax, reducing costs for American families, enhancing consumer protections, and addressing housing affordability, while contrasting her policies with those of her Republican opponent Trump.

Key Components of Harris's Economic Plan:

·         Key Components of Harris's Tax Plan

·         Corporate Tax Rate Increase: Harris is proposing raising the corporate tax rate from 21% to 28%, which would generate billions in additional revenue. This would partially roll back the corporate tax cuts passed under the Trump administration in 2017

·         Cost of Living Expenses Reduction Initiatives Through so-called price control mechanism (socialistic approach in a capitalist economy!)

·         Grocery and Consumer Prices: Harris aims to tackle inflation by proposing a Federal ban on price gouging, particularly targeting food companies that unfairly inflate prices. This would be the first Federal regulation of its kind in the U.S. She plans to empower the Federal Trade Commission (FTC) and state attorneys general (SAG) to enforce these measures and impose penalties on violators

·         Tax Cuts/Expanding Child tax credits for Families: A significant part of her plan includes expanding the Child Tax Credit, offering middle- and lower-income families up to $6,000 in tax breaks for newborns.

·         Eliminating Taxes on Tips: Harris also supports eliminating taxes on tips for restaurant workers, aligning with similar proposals from Trump

·         Housing Affordability: Harris has committed to addressing the US housing crisis by proposing the construction of 3 million new homes over the next four years

·         Harris’ Housing plan includes:

·         Tax Incentives: Introducing new tax incentives for builders of starter homes and affordable rental properties

·         Down Payment Assistance: Offering an average of $25,000 in down payment support for first-time homebuyers, particularly targeting first-generation buyers

·         Healthcare and Medical Costs: Harris's plan also emphasizes healthcare affordability. She supports measures to allow Medicare to negotiate lower drug prices, aiming to reduce costs by 40% to 80% on commonly used medications starting in 2026. Additionally, she plans to cancel $7 billion of medical debt for up to 3 million Americans

·         Economic Accountability: Harris's approach includes holding corporations accountable for their pricing practices, particularly in the grocery sector. She intends to implement clear regulations to prevent large corporations from exploiting consumers (greedflation), thereby enhancing economic stability for average Americans

·         Political Context and Strategy: In her speeches, Harris has positioned herself as a forward-thinking candidate, contrasting her vision with what she describes as Trump's outdated economic policies. She emphasizes that her proposals are designed to empower the middle class and address the pressing financial concerns of families

·         As she prepares for the upcoming Democratic National Convention, Harris's economic plan aims to resonate with voters who are dissatisfied with the current economic climate, especially regarding inflation and housing costs. Her campaign seeks to energize support by addressing these critical issues head-on, while also maintaining a strategic distance from some of Biden's more controversial policies

·         Overall, Harris's economic and social plan reflects a comprehensive approach aimed at alleviating financial burdens on families, enhancing consumer protections, and fostering economic growth through housing initiatives and healthcare reforms

·         The economic and social plans of Harris and Trump for the November 2024 U.S. presidential election present significant contrasts in their approaches and priorities. Here are the major differences:

·         Contrasting with Trump's Tax Policies:

·         Harris will differentiate her tax policies from Trump's, while upholding Biden's commitment to not raising taxes on individuals earning $400,000 or less annually

·         Trump had previously reduced the corporate tax rate from 35% to 21% and introduced other tax incentives that are set to expire next year

·         Trump has pledged to make these tax cuts permanent and suggested implementing new, universal tariffs on imports, a proposal that Harris opposes

·         Overall, Harris's tax plan focuses on increasing corporate taxes to fund her economic initiatives, expanding tax credits for families, and reducing healthcare costs. It stands in contrast to Trump's policies of lowering corporate taxes and potentially implementing new tariffs

·         Economic Vision:

·         Harris- Forward-Looking Approach: Harris positions her economic strategy as progressive and focused on future needs, aiming to enhance the lives of middle-class Americans and address contemporary challenges such as inflation and housing affordability. She emphasizes consumer protection, proposing measures like a federal ban on price gouging and expanding the Child Tax Credit to alleviate financial burdens on families

·         Focus on Accountability: Harris's plan includes holding corporations accountable for unfair pricing practices and empowering regulatory bodies to enforce these measures. Her agenda also highlights investments in affordable housing and healthcare, aiming to reduce costs for families and improve access to essential services

·         Trump

·         Backwards-Looking Perspective: Trump’s economic vision is characterized as nostalgic, focusing on revitalizing policies from his previous administration. He emphasizes tax cuts and deregulation, aiming to make previous tax reductions permanent and proposing new tariffs on imports to protect American industries (anti-China tariffs); Trump is trying to cover revenue deficit for the cut in corporate tax with higher import tsx/duties (tariffs)

·         Critique of Current Administration: Trump has primarily focused on criticizing the Biden administration's handling of the economy, particularly regarding inflation, rather than presenting a detailed new economic plan of his own. His campaign strategy involves framing the election as a referendum on the current economic management rather than a choice between distinct policy visions; Trump is largely depending on Biden’s anti-incumbent wave

Harris and Trump’s Key Policy Differences

·         Taxation

·         Harris: Proposes raising the corporate tax rate to 28% and expanding tax credits for families, particularly the Child Tax Credit, to support low- and middle-income households. She aims to ensure that tax reforms benefit working families rather than corporations

·         Trump: Focuses on maintaining and expanding the corporate tax cuts established during his presidency, advocating for tax reductions aimed at middle-class families and eliminating taxes on tipped wages, a position that aligns with Harris's recent proposals

·         Social Issues

·         Harris: Prioritizes social issues such as healthcare affordability and housing stability, proposing expanded access to government-subsidized healthcare and significant investments in affordable housing initiatives

·         Trump: While he addresses social issues, his focus tends to be on economic growth through deregulation and tax cuts, often sidelining broader social welfare initiatives in favor of traditional conservative economic policies

In summary, Harris's economic and social plan for the 2024 election emphasizes a progressive, future-oriented approach focused on consumer protection, corporate accountability, and support for families. In contrast, Trump's strategy is rooted in a nostalgic view of past policies, advocating for tax cuts and deregulation while critiquing the current administration. These differences reflect broader ideological divides between the two candidates, shaping their respective campaign narratives as they head into the election.

But as neither Harris nor Trump may be able to win a Trifecta (majority government with both House and Senate in control), and as the US may be heading for a hung Parliament (Capitol Street), we may see no major policy shift amid high probable political & policy paralysis. Thus the market is showing no major volatility ahead of US election. Meanwhile, RFK Jr. may also withdraw nomination in favor of Trump, which may again help Trump to bridge the 2% gap with Harris to some extent.

On Wednesday, some focus of the market was on FOMC minutes (July) ahead of Fed Chair Powell’s comments/speech at the annual symposium at Jackson Hole, where Powell is expected to indicate policy stance change or even a rate cut from Sep’24 without further waiting for Dec’24.

Relevant text of FOMC minutes (July)

Fed Staff Economic Outlook:

“The economic forecast prepared by the staff for the July meeting implied a lower rate of resource utilization over the projection period relative to the forecast prepared for the previous meeting. The staff's outlook for growth in the second half of 2024 had been marked down largely in response to weaker-than-expected labor market indicators. As a result, the output gap at the start of 2025 was somewhat narrower than had been previously projected, although still not fully closed. Over 2025 and 2026, real GDP growth was expected to rise about in line with potential, leaving the output gap roughly flat in those years. The unemployment rate was expected to edge up slightly over the remainder of 2024 and then to remain roughly unchanged in 2025 and 2026.

The staff's inflation forecast was slightly lower than the one prepared for the previous meeting, reflecting incoming data and the lower projected level of resource utilization. Both total and core PCE price inflation were expected to decline further as demand and supply in product and labor markets continued to move into better balance; by 2026, total and core inflation were expected to be around 2 percent.

The staff continued to view the uncertainty around the baseline projection as close to the average over the past 20 years. Risks to the inflation forecast were still seen as tilted to the upside, albeit to a smaller degree than at the time of the previous meeting. The risks around the forecast for real activity were viewed as skewed to the downside, both because more-persistent inflation could result in tighter financial conditions than in the baseline and because the recent softening in some indicators of labor market conditions might be pointing to a larger-than-anticipated slowdown in aggregate demand growth.

Participants' Views on Current Conditions and the Economic Outlook

“Participants observed that inflation had eased over the past year but remained elevated and that, in recent months, there had been some further progress toward the Committee's 2 percent inflation objective. Participants noted that the recent progress on disinflation was broad based across the major subcomponents of core inflation. Core goods prices were about flat from March through June after having risen during the first three months of the year. Price inflation in June for housing services showed a notable slowing, which participants had been anticipating for some time. In addition, core non-housing services prices had decelerated in recent months.

Some participants noted that the recent data corroborated reports from their business contacts that firms' pricing power was waning, as consumers appeared to be more sensitive to price increases. Various contacts had also reported that they had cut prices or were offering discounts to stay competitive, or that declines in input costs had helped reduce pressure on retail prices.

With regard to the outlook for inflation, participants judged that recent data had increased their confidence that inflation was moving sustainably toward 2 percent. Almost all participants observed that the factors that had contributed to recent disinflation would likely continue to put downward pressure on inflation in coming months. These factors included a continued waning of pricing power, moderating economic growth, and the runoff in excess household savings accumulated during the pandemic.

Many participants noted that the moderation of growth in labor costs as labor market conditions rebalanced would continue to contribute to disinflation, particularly in core non-housing services prices. Some participants noted that the lags in the time it takes for housing rental conditions for new tenants to show through to aggregate price data for housing services meant that the disinflationary trend in this component would likely continue.

Participants also observed that longer-term inflation expectations had remained well anchored and viewed this anchoring as underpinning the disinflation process. A couple of participants noted that inflation pressures might persist for some time, as they assessed that the economy had considerable momentum, and that, even with some easing of the demand for labor, the labor market remained strong.

Participants assessed that supply and demand conditions in the labor market had continued to come into better balance. The unemployment rate had moved up but remained low, having risen 0.7 percentage point since its trough in April 2023 to 4.1 percent in June. The monthly pace of payroll job gains had moderated from the first quarter but had been solid in recent months.

However, many participants noted that reported payroll gains might be overstated, and several assessed that payroll gains may be lower than those needed to keep the unemployment rate constant with a flat labor force participation rate. Participants observed that other indicators also pointed to easing in labor market conditions, including a lower hiring rate and a downtrend in job vacancies since the beginning of the year. Participants noted that the rebalancing of labor market conditions over the past year was also aided by an expansion of the supply of workers, reflecting increases in the labor force participation rate among individuals aged 25 to 54 and a strong pace of immigration. Participants noted that, with continued rebalancing of labor market conditions, nominal wage growth had continued to moderate.

Many participants cited reports from District contacts that supported the view that labor market conditions had been easing. In particular, contacts reported that they had been experiencing less difficulty in hiring and retaining workers and that they saw limited wage pressures. Participants generally assessed that, overall, conditions in the labor market had returned to about where they stood on the eve of the pandemic—strong but not overheated.

Regarding the outlook for the labor market, participants discussed various indicators of layoffs, including initial claims for unemployment benefits and measures of job separations. Some participants commented that these indicators had remained at levels consistent with a strong labor market. Participants agreed that these and other indicators of labor market conditions merited close monitoring. Several participants said that their District contacts reported that they were actively managing head counts through selective hiring and attrition.

Participants noted that real GDP growth was solid in the first half of the year, though slower than the robust pace seen in the second half of last year. PDFP growth, which usually gives a better signal than GDP growth of economic momentum, also moderated in the first half, but by less than GDP growth. PDFP expanded at a solid pace, supported by growth in consumer spending and business fixed investment. Participants viewed the moderation in the growth of economic activity to be largely in line with what they had anticipated.

Regarding the household sector, participants observed that consumer spending had slowed from last year's robust pace, consistent with restrictive monetary policy, easing of labor market conditions, and slowing income growth. They noted, however, that consumer spending had still grown at a solid pace in the first half of the year, supported by the still-strong labor market and aggregate household balance sheets.

Some participants observed that lower- and moderate-income households were encountering increasing strains as they attempted to meet higher living costs after having largely run down savings accumulated during the pandemic. These participants noted that such strains were evident in indicators such as rising credit card delinquency rates and an increased share of households paying the minimum due on balances, and warranted continued close monitoring.

Several participants cited reports that consumers, especially those in lower-income households, were shifting away from discretionary spending and switching to lower-cost food items and brands. A couple of participants remarked that spending by some higher-income households was likely being bolstered by wealth effects from equity and housing price appreciation. Participants noted that residential investment was weak in the second quarter, likely reflecting the pickup in mortgage rates from earlier in the year.

Regarding the business sector, participants noted that conditions varied by firm size, sector, and region. A couple of participants noted that their District contacts had reported larger firms as having a generally stable outlook, while the outlook for smaller firms appeared more uncertain. A few participants said that their contacts reported that conditions in the manufacturing sector were somewhat weaker, while the professional and business services sector and technology-related sectors remained strong. A few participants noted that the agricultural sector continued to face strains stemming from low food commodity prices and high input costs.

Participants discussed the risks and uncertainties around the economic outlook. Upside risks to the inflation outlook were seen as having diminished, while downside risks to employment were seen as having increased. Participants saw risks to achieving the inflation and employment objectives as continuing to move into better balance, with a couple noting that they viewed these risks as more or less balanced.

Some participants noted that as conditions in the labor market have eased; the risk had increased that continued easing could transition to a more serious deterioration. As sources of upside risks to inflation, some participants cited the potential for disruptions to supply chains and a further deterioration in geopolitical conditions. A few participants noted that an easing of financial conditions could boost economic activity and present an upside risk to economic growth and inflation.

In their discussion of financial stability, participants who commented noted vulnerabilities to the financial system that they assessed warranted monitoring. Some participants observed that the banking system was sound but noted risks associated with unrealized losses on securities, reliance on uninsured deposits, and interconnections with nonbank financial intermediaries.

In their discussion of bank funding, several participants commented that, because the discount window is an important liquidity backstop, the Federal Reserve should continue to improve the window's operational efficiency and to communicate effectively about the window's value.

Participants generally noted that some banks and nonbank financial institutions likely have vulnerabilities associated with high CRE exposures through loan portfolios and holdings of CMBS. Most of these participants remarked that risks related to CRE exposures depend importantly on the property type and the local market conditions of the properties involved.

A couple of participants noted concerns about asset valuation pressures in other markets as well. Many participants commented on cyber risks that could impair the operation of financial institutions, financial infrastructure, and, potentially, the overall economy. Many participants remarked that because a few firms play a substantial role in the provision of information technology services to the financial sector and because of the highly interconnected nature of some firms in the financial industry itself, there was an increased risk that significant cyber disruptions at a small number of key firms could have widespread effects.

Several participants noted that leverage in the Treasury market remained a risk, that it would be important to monitor developments regarding Treasury market resilience amid the move to central clearing, or that it is valuable to communicate about the Federal Reserve's standing repo facility as a liquidity backstop. A couple of participants commented on the financial condition of low- and moderate-income households that have exhausted their savings and the importance of monitoring rising delinquency rates on credit cards and auto loans.

In their consideration of monetary policy at this meeting, participants observed that recent indicators suggested that economic activity had continued to expand at a solid pace, job gains had moderated, and the unemployment rate had moved up but remained low. While inflation remained somewhat above the Committee's longer-run goal of 2 percent, participants noted that inflation had eased over the past year and that recent incoming data indicated some further progress toward the Committee's objective.

All participants supported maintaining the target range for the federal funds rate at 5-1/4 to 5-1/2 percent, although several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision. Participants furthermore judged that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings

In discussing the outlook for monetary policy, participants noted that growth in economic activity had been solid, there had been some further progress on inflation, and conditions in the labor market had eased. Almost all participants remarked that while the incoming data regarding inflation were encouraging, additional information was needed to provide greater confidence that inflation was moving sustainably toward the Committee's 2 percent objective before it would be appropriate to lower the target range for the federal funds rate.

Nevertheless, participants viewed the incoming data as enhancing their confidence that inflation was moving toward the Committee's objective. The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting. Many participants commented that monetary policy continued to be restrictive, although they expressed a range of views about the degree of restrictiveness, and a few participants noted that ongoing disinflation, with no change in the nominal target range for the policy rate, by itself results in a tightening in monetary policy.

Most participants remarked on the importance of communicating the Committee's data-dependent approach and emphasized, in particular, that monetary policy decisions are conditional on the evolution of the economy rather than being on a preset path or that those decisions depend on the totality of the incoming data rather than on any particular data point. Several participants stressed the need to monitor conditions in money markets and factors affecting the demand for reserves amid the ongoing reduction in the Federal Reserve's balance sheet.

In discussing risk-management considerations that could bear on the outlook for monetary policy, participants highlighted uncertainties affecting the outlook, such as those regarding the amount of restraint currently provided by monetary policy, the lags with which past and current restraint have affected and will affect economic activity, and the degree of normalization of the economy following disruptions associated with the pandemic.

A majority of participants remarked that the risks to the employment goal had increased, and many participants noted that the risks to the inflation goal had decreased. Some participants noted the risk that a further gradual easing in labor market conditions could transition to a more serious deterioration.

Many participants noted that reducing policy restraint too late or too little could risk unduly weakening economic activity or employment. A couple participants highlighted in particular the costs and challenges of addressing such a weakening once it is fully under way. Several participants remarked that reducing policy restraint too soon or too much could risk a resurgence in aggregate demand and a reversal of the progress on inflation. These participants pointed to risks related to potential shocks that could put upward pressure on inflation or the possibility that inflation could prove more persistent than currently expected.”

Overall, Fed is ready to start cutting rates from Serp’24 provided economic data in totality supports Fed’s needed confidence and for that Fed may watch August employment and core inflation data closely. If August job/employment data comes as ‘terrible’ / mixed as July, while core inflation eased by another 0.10% in August, then Fed may launch the 11-QTR rate cuts cycle from Sep’24 QTR; otherwise it may want to observe more data (at least Sep-Oct-Nov’24) before launching the same from Dec’24 QTR.

On Tuesday, Fed’s Governor Bowman said:

·         Some recent further progress on lowering inflation. Remain cautious on cuts

·         It is possible that the strength of hiring has been overstated and that rise in the unemployment rate is exaggerating signs of cooling

·         I still see the need to pay close attention to the price-stability side of our mandate while watching for risks of a material weakening in the labor market

·         I will remain cautious in my approach to any change in the policy stance

·         While the unemployment rate is up, it is still historically low

·         Wage gains remain above the pace consistent with our inflation goal

·         Should incoming data show inflation is moving sustainably toward the target, it will become appropriate to gradually lower rates to prevent becoming overly restrictive

·         We need to be patient and avoid undermining continued progress on lowering inflation by overreacting to any single data point

·         We must view the totality of data as risks to employment and the price-stability mandates move into better balance

·         I still sees upside risks to inflation

·         I have seen some recent further progress on lowering inflation, but inflation is still uncomfortably above the committee’s 2% goal

·         The labor market continues to loosen and come into better balance

·         Progress of disinflation may be muted in June-July

August 20, 2024: Remarks on the Economic Outlook and Financial Inclusion by Fed Governor Michelle W. Bowman At the Alaska Bankers Association, Anchorage, Alaska

Economic and Monetary Policy Outlook-Full text

“Over the past two years, the Federal Open Market Committee (FOMC) has significantly tightened the stance of monetary policy to address high inflation. At our July meeting, the FOMC voted to continue to hold the federal funds rate target range at 5-1/4 to 5-1/2 percent and to continue to reduce the Federal Reserve's securities holdings.

After seeing considerable progress last year, in recent months we have seen some further progress on lowering inflation. The 12-month measures of total and core personal consumption expenditures (PCE) inflation, which I prefer to the more volatile higher-frequency readings, have moved down since April, although they have remained somewhat elevated at 2.5 percent and 2.6 percent in June, respectively. In addition, the latest consumer and producer price index reports indicate that 12-month core PCE inflation likely remained a bit above 2.5 percent in July. The progress in lowering inflation since April is a welcome development, but inflation is still uncomfortably above the Committee's 2 percent goal.

Prices continue to be much higher than before the pandemic, which continues to weigh on consumer sentiment. Inflation has hit lower-income households hardest, since food, energy, and housing services price increases far outpaced overall inflation over the past few years.

Economic activity moderated in the first half of this year after increasing at a strong pace last year. Private domestic final purchases (PDFP) growth was solid and slowed much less than gross domestic product (GDP), as the slowdown in GDP growth was partly driven by volatile categories such as net exports, suggesting that underlying economic growth was stronger than GDP indicated. Unusually strong consumer goods spending last year softened in the first quarter of this year, largely accounting for the step-down in PDFP growth. Goods spending rebounded in the second quarter and retail sales continued to rise at a solid pace in July.

Consumers appear to be pulling back on discretionary items and expenses, as evidenced in part by a decline in restaurant spending since late last year. Low- and moderate-income consumers no longer have savings to support this type of spending, and we've seen a normalization of loan delinquency rates as they have risen from historically low levels during the pandemic.

The labor market continues to loosen, as the number of available workers has increased and the number of available jobs has declined—signs that illustrate the labor market is coming into better balance. After slowing in the second quarter, payroll employment gains eased to a more modest pace in July, even as job openings are being filled by the increased immigrant labor supply.

The latest labor market report shows that the unemployment rate stood at 4.3 percent in July. Although notably higher than a year ago, this is still a historically low unemployment rate. In addition, the ratio of job vacancies to unemployed workers has declined to its pre-pandemic level. We are also seeing a slowing in wage growth, which now stands at just under 4 percent as measured by the employment cost index. However, given trend productivity, wage gains remain above the pace consistent with our inflation goal.

My baseline outlook is that inflation will decline further with the current stance of monetary policy. Should the incoming data continue to show that inflation is moving sustainably toward our 2 percent goal, it will become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive on economic activity and employment.

But we need to be patient and avoid undermining continued progress on lowering inflation by overreacting to any single data point. Instead, we must view the data in their totality as the risks to the Committee's employment and price-stability mandates continue to move into better balance. That said, I still see some upside risks to inflation as supply conditions have now largely normalized and any further improvements to supply seem less likely to offset price pressures arising from increasing geopolitical tensions, additional fiscal stimulus, and increased demand for housing due to immigration.

There are also risks that the labor market has not been as strong as the payroll data have been indicating, and it appears that the recent rise in unemployment may be exaggerating the degree of cooling in labor markets. The Q4 Quarterly Census of Employment and Wages (QCEW) report suggests that job gains have been consistently overstated in the establishment survey since March of last year, while the household survey unemployment data have become less accurate as response rates have appreciably declined since the pandemic.

The rise in the unemployment rate this year largely reflects weaker hiring, as job searchers entering the labor force are taking longer to find work, and layoffs remain low. It is also likely that some temporary factors contributed to the soft July employment report. The rise in the unemployment rate in July was largely accounted for by workers who are experiencing a temporary layoff and are more likely to be rehired in coming months. Hurricane Beryl also likely contributed to weaker job gains, as the number of workers not working due to bad weather increased significantly last month.

In light of upside risks to inflation and uncertainty regarding labor market conditions and the economic outlook, I will continue to watch the data closely as I assess the appropriate path of monetary policy. Increased measurement challenges and the frequency and extent of data revisions over the past few years make the task of assessing the current state of the economy and predicting how it will evolve even more challenging. I will remain cautious in my approach to considering adjustments to the current stance of policy.

It is important to note that monetary policy is not on a preset course. In my view, we should consider a range of possible scenarios that could unfold when assessing how the FOMC's monetary policy decisions may evolve. My colleagues and I will make our decisions at each FOMC meeting based on the incoming data and the implications for and risks to the outlook and guided by the Fed's dual-mandate goals of maximum employment and stable prices. By the time of our September meeting, we will have seen additional economic data and information, including one employment and one inflation report. We will also monitor how developments in broader financial conditions might influence the economic outlook.

I will continue to closely watch the data and visit with a broad range of contacts as I assess economic conditions and the appropriateness of our monetary policy stance. As I noted earlier, I continue to view inflation as somewhat elevated. And with some upside risks to inflation, I still see the need to pay close attention to the price-stability side of our mandate while watching for risks of a material weakening in the labor market. My view continues to be that restoring price stability is essential for achieving maximum employment over the longer run.”

Overall, Fed’s Bowman may be still in wait & watch mode and not in a hurry to cut rates from Sep’24 unless he/Fed gets more confidence about price stability target on a sustainable basis without causing an all-out recession (hard landing) and material/serious damage to the labor/job market.

On early Thursday, Kanas Fed’s President Schmid said:

·         When asked about jobs benchmark revisions: It doesn't change a lot

·         We've seen some cooling in the labour market, but it's generally pretty strong

·         I still believe quite strongly that we have to sustainably trend inflation back to 2%, there is still work to do on that

·         Unemployment rate bears are looking harder at it

·         I am going to let the data show where we go

·         The last two or three inflation prints were pretty positive

·         You probably want to act before inflation gets to 2%

·         Rates are not overly restrictive; there is room to consider where we go from here

·         I frankly think we have time to decide

Fed’s Schmid is clearly in wait & watch mode to be more confident for launching the 11-QTR rate cut cycle from Dec’24 rather than Sep’24; he is also not ready to accept US labor/job market recession despite July’s terrible and 2024 negative revision as indicated by the BLS Wednesday.

Conclusions:

Fed Chair Powell indicated Fed may further evaluate economic data in August (unemployment and core CPI) and the outlook thereof before deciding on any rate cut moves. If overall data is not satisfactory to provide the much-awaited confidence about the disinflation process, then the Fed may further watch September data (Q3CY24) and outlook thereof for any rate cuts from Dec’24. If the Fed indeed goes for rate cuts based on one/two months of mixed/bad jobs data, then it may look Fed is panicking.

We may see better/improved/upbeat US job data for not only August but also for Sep and October and a moderate inflation report (ahead of Nov’24 US election) to justify Bidenomics. Fed is not in a hurry to start the rate cut cycles of 11 QTR cuts without evaluating data for a few more months in totality. Thus Fed may not only evaluate inflation and employment data for July and August but also for September and October/ November before launching the much-awaited rate cut cycles from Dec’24 QTR end.

Despite the market now suddenly panicking for a hard landing for the ‘terrible’ NFP/BLS job report for July, if we consider the increasing number of multiple job holders, higher number of temporary layoffs, and an unusual addition in labor force due to one-time seasonal factor), the overall nature of US labor market is still strong enough for Fed to continue its wait & watch stance to gain more disinflation pace and required full confidence to launch the series of rate cuts from Dec’24 rather than Sep’24.

But even if the Fed responds to the present market panic and begins cutting rates from Sep’24 instead of Dec’24, it will make no significant difference in reality (Real Street) but may boost the sentiment of Wall Street by ensuring financial stability first. In that scenario, even if the Fed cuts the rate by -25 bps each (no question of -50 bps pace), it will continue the pace of 4 rate cuts each in 2025-26 and one QTR/HLY cut in 2027.

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24 as the Fed may want to observe inflation and employment data for Q3CY24. Also, the Fed may be on the sideline till the Nov’24 US election amid growing political & policy uncertainty after Biden exited from the Presidential run, paving the way for the Trump-Harris fight, which may not be smooth for Trump 2.0.

Although the market is now almost discounting the start of Fed rate cuts from Sep’24, considering overall pace of disinflation, Fed may continue its wait & watch stance till at least Dec’24 and may continue to indicate on 31st July FOMC/policy meeting that Fed is gaining incrementally higher confidence for overall disinflation process till Q2CY24, but still it’s not enough for launching the rate cut cycle in Sep’24 as Fed may want to be more confident after having actual data for another QTR. If Q3CY24 average US Core inflation (CPI+PCE) indeed goes around +2.9%; i.e. below the +3.0% ‘confidence’ line, then the Fed may officially indicate the start of the 11-QTR rate cut cycle from Dec’24 QTR till Dec’27 (two half yearly rate cuts in 2027).

The Fed will get the Sep’24 core inflation report by mid-late Oct’24 and accordingly may indicate the rate cut from Dec’24, just ahead of the Nov’24 election to keep both Democrats and Republicans happy; the Fed may indicate the start of a rate cut in Oct’24 (just ahead of the Nov’24 election) Fed talks and may start cutting rates from Dec’24 (just after the Nov’24 election), keeping Wall Street near life time high with some healthy corrections.

But at the same time Fed will continue its jawboning (forward guidance) to prepare the market to ensure the official dual mandate (maximum employment, price stability) along with an unofficial mandate to ensure financial stability (Wall Street and bond market); Fed may not allow core real bond yield (10Y) above +1.0% under any circumstances to manage government borrowing costs, which is now hovering around 15% of US core tax revenue, quite elevated against EU and China’s 6% levels.

Market wrap:

On early Thursday, Wall Street Futures were almost flat on lingering suspense about an early Fed pivot and Gaza war ceasefire coupled with in line with estimates jobless claims report.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Whatever the narrative, technically Dow Future (39300) has to sustain over 39900 for any further rally to 40100/40500-41050/41450* and 41675*/41950-42100*/42700 in the coming days; otherwise sustaining below 39800/39550, DJ-30 may again fall to 39200 and 39000/38800-38600/38300-38000 in the coming days.

Similarly, NQ-100 Future (18300) has to sustain over 18800-19000 for any further recovery to 19300/19600-19750/19950 and 20150*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 18700/18500-18200/18000 it may further fall to 17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5300), now has to sustain over 5450 for any further recovery to 5475/5525-5605/5675 and rally further to 5725/5750*-5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5425/5400-5350/5300 may further fall to 5250/5200-5175/5100* and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2400) has to sustain over 2425-2440 for a further rally to 2455*/2490-2500*/2525-2535/2540* and 2560*/2575-2600/2650 in the coming days; otherwise sustaining below 2420-2410, may fall to 2395/2385-2370/2360 and 2350*/2340-2320/2300-2290/2275* and 2235/2210-2160/2110 in the coming days (depending upon Fed stance, Gaza/Ukraine war trajectory and US election outcome).