ProLogis: Expects the Federal Reserve to cut interest rates by 25 basis points in September, with a total reduction of 50 basis points for the year

According to the Zhitong Finance APP, Federal Reserve Chairman Jerome Powell will deliver a speech at the Jackson Hole seminar on Friday (August 22) U.S. time, with the theme "Transforming the Labor Market: Demographics, Productivity, and Macroeconomic Policy." This will be Powell's last speech at Jackson Hole as Federal Reserve Chairman. Blerina Uruci, Chief U.S. Economist at PNC Financial Services, shared her expectations for the speech, believing it will not only have policy implications but also serve as an opportunity for him to review his performance during his tenure and its legacy.

The following are the three main points expected to be covered in the speech.

Expected to emphasize that decisions depend on inflation and labor market data

Uruci stated that Powell is likely to retain maximum policy flexibility for the upcoming meetings, emphasizing that decisions will depend on inflation and labor market data. Before the Federal Reserve meeting on September 17, employment reports and Consumer Price Index (CPI) data are yet to be released. His tone at the July press conference was slightly hawkish, but after the downward revision of employment data in May and June, the risks in the labor market are skewed to the downside. He may adopt a more neutral stance, with the ideal situation being that market expectations for policy in 2025 remain unchanged after the speech.

The baseline forecast for the Federal Open Market Committee (FOMC) meeting in September is a 25 basis point rate cut, with a total reduction of 50 basis points for the year. If inflation significantly exceeds expectations or the labor market rebounds strongly, the meeting may yield a hawkish outcome (no rate cut); if August job growth slows to below 50,000 per month and the unemployment rate rises, a dovish outcome (a 50 basis point cut) may occur.

Based on recent data, the probabilities for both hawkish and dovish scenarios at the September meeting are low. Inflation is expected to accelerate in the fourth quarter of 2025, limiting the risk of an unexpected CPI in August; at the same time, economic resilience is higher than recent employment growth suggests, reducing the downside risks in the labor market.

May emphasize the need to monitor multiple indicators to determine if full employment is achieved

Powell may elaborate on the significance of full employment for the economy, emphasizing the need to monitor multiple economic indicators to determine if full employment is achieved, as the reference value of a single indicator may change over time. He may reiterate his July viewpoint: the simultaneous decline in labor demand and supply means that even if labor demand slows, if the labor supply also decreases, the labor market may not necessarily show weakness.

Structural changes have substantial impacts, and the balanced pace of job growth that stabilizes the unemployment rate may drop to 50,000 positions per month. Therefore, a significant slowdown in job growth may not reflect an economic recession but rather a sign of structural transformation. Powell and other FOMC members thus view the unemployment rate as a more reliable indicator of labor market health.

Expected to abandon FAIT for a more balanced approach to employment and inflation targets

The flexible average inflation targeting (FAIT) framework introduced in the 2020 monetary policy framework review (MPFR) allows for overshooting after inflation falls below target to combat deflationary pressures following the global financial crisis; it also commits to allowing the labor market to overheat, applicable only when the Phillips curve is flat and a tight labor market does not push up inflation. Before the pandemic, this framework aimed to address the central bank's main challenge, which was the rising risk of deflation. However, the sharp rise in inflation post-pandemic and its lessons indicate the need to revise elements introduced in the 2020 framework The Federal Reserve is expected to abandon FAIT and more evenly balance its employment and inflation targets, while reaffirming the importance of the 2% inflation target and stable inflation expectations. The new framework will provide guidance for multiple possible economic conditions, including when the zero lower bound constraint is in effect, utilizing forward guidance and balance sheet measures to enhance the effectiveness of monetary policy