Rate Cut: Jackson Hole Symposium to lay the groundwork for first rate cut of this cycle – James Knightley

Quantitative easing was announced in 2009 at Jackson Hole. Nothing has happened since then or beyond. Why? financial markets Are you always excited and looking forward to the Jackson Hole event? In recent years, nothing new has emerged from there.
James Knightley: That’s true, but it’s a forum where a lot of central bankers from around the world meet and they can discuss a lot of new ideas and new ways of thinking. It’s possible that it will spark some interest. There’s always a glimmer of hope that something very interesting will come out of it. I think this year Jackson Hole Symposium is laying the groundwork for that first interest rate cut in this business cycle.

I agree with you that the minutes of the July FOMC meeting have already prepared us for the September meeting. But we may get a little bit more information about the planning path to where we may end up in terms of interest rates, in terms of current thinking because remember that in June the Fed only said there would be one rate cut this year. So this will give you a little bit more opportunity to make your case: do you think the market pricing of 100 basis points or so of rate cuts is right or is it too much or too little? So it’s not about kicking off rate cuts, it’s more about the planning path and where we may end up.

I mean, the key debate for the market is when is rate easing going to happen. Do you think a rate cut in September is well-considered and, if that doesn’t happen, do you think the likelihood of an extreme market reaction is also a possibility on the table?
James Knightley: Now everybody accepts that there will be a rate cut in September. Even the more hawkish members of the FOMC committee have signaled that they are open to that idea. And in fact, the minutes of the July meeting suggested that some people thought they might have gone in July. So, the momentum, in the wake of the weak jobs numbers and the more subdued inflation data, is aligning in the direction of a rate cut in September. Powell will probably confirm that tomorrow or today and, in that regard, either a 25 basis point cut, which is what the market is currently favoring, or whether they might feel the need to step up their efforts and do more.

Remember, we had those big downward revisions in US jobs this week and that’s in an environment where we still have another jobs report coming before the FOMC meeting and more inflation data coming before the FOMC meeting, we could still see a 50 basis point cut potentially.

What about all these recession fears that have suddenly come to light? It had been raised to 25%, and now JPMorgan has reduced it to 20%. Do you see any risk in terms of growth and the possibility of recession?
James Knightley: There is always a risk and, especially this week, we have seen that with those downward revisions to jobs there have been real credibility issues in the quality of the data that we have seen published. Now, if you revise the situation to eliminate a third of all jobs created between April 2023 and March 2024, what else has been wrong? In terms of concerns about the quality of data coming in at a time when the economy is losing momentum, I don’t think we can be categorical about anything. We have to say that there are risks that we could see a more abrupt and sharp slowdown in the US economy. I wouldn’t rule anything out and this just shows the fallibility of the data, not just from the US but everywhere, from Europe, from India, none of it is categorically always correct. Sampling errors, model errors, all kinds of errors can creep in. We have to be very flexible.On August 2, we would have been discussing the collapse of the yen carry trade, the probability of a 25% recession in the US according to Goldman Sachs, US jobs data that didn’t look too encouraging, and the world going through a risk-off movement. Financial experts told buyers to beware. Suddenly, that narrative has changed. Indices are at new highs. Gold is at a new high. Bitcoin is at a new high. What’s going on?
James Knightley: There are many things. The world is still awash in cash and at any opportunity to buy, people jump at it. We need clarity on the data front and unfortunately I don’t think we’re going to get that any time soon.

Central bankers around the world are testing the waters. The quality of data simply doesn’t exist anywhere in the world and that makes policymaking even more difficult. That’s why I’m very reluctant to be too categorical on anything right now and I think we could be in for a fairly volatile period for financial markets over the next 6 to 12 months or so because if we’re seeing a loss of momentum in the US economy and in the Chinese economy, very few economies can withstand all that.

Europe exports a lot to the United States and China and there is always the risk of contagion. Nobody is going to be immune if there is a global recession. So there are a lot of risks and I don’t want to be too categorical on anything at the moment. We have to be flexible, wait for the data flow to come in and we will start to see the Fed take a more risk-conscious approach and we will see those rate cuts come to fruition. The risk is that the Fed will end up having to cut interest rates a bit more than it is currently signalling.