- Federal Reserve Chair Jerome Powell signaled a potential interest rate cut in September during his speech at the Jackson Hole Symposium. This has sparked a debate among market participants about whether the Fed will opt for a 25 or 50 basis point cut.
Federal Reserve Chair Jerome Powell signaled a rate cut in September during his speech at the Jackson Hole Symposium last Friday. In response, the British pound surged over 1%, climbing above $1.322, its highest level since March 2022. Meanwhile, the USD/MXN dropped more than 2%, and the NZD/USD and AUD/USD pairs gained 1.5% and 1.3%, respectively.
This week, market participants will continue to digest Powell’s comments, with discussions centering around the likelihood of a 25 or 50 basis point cut and where the Fed funds rate might land. Some derivatives markets are already pricing in expectations for the Fed to target a 3% neutral rate. The current range is of course 5.25% to 5.5%.
Former Treasury Secretary Lawrence Summers expressed skepticism about the Fed’s neutral rate being 3%, arguing that “Fed’s making a serious mistake by believing that the neutral interest rate is so low”. This could indicate that the Fed is about to move faster or harder than the economy needs. Despite this, most market participants anticipate a cautious approach from the Fed, favoring a 25 basis point cut in the upcoming meeting over a more aggressive 50 basis point reduction.
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