Federal Reserve

Jackson Hole: The Fed is trade war dependent

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Powell was slightly more dovish, opening the door to further easing measures in September, mostly to offset negative trade developments. However, there is still a lack of clarity from the Fed regarding where we are in the current business cycle.


Jerome Powel Jackson Hole speech on “Challenges for Monetary Policy” was highly anticipated due to new tensions on the trade war front, and mixed message sent by the latest FOMC minutes.

In the chart below, you can see a very short summary of the US macroeconomic outlook: downward pressure on the economy but overall doing fine, risk contagion from the manufacturing sector to the service sector, which tends to confirm the late-cycle thesis, and risk of recession back to levels reached before the Global Financial Crisis.

Our main takeaways:

  • Our first impression is that Powell was slightly more dovish, which indicates the door is open to a new rate cut in September. He has not clearly downplayed a 50 bps cut next month but, based on his overall positive outlook for the US economy, there is no reason at this point to believe that the FED is about to announce a bigger cut than 25 bps.

  • The Fed is now trade war dependent, which is probably the most important point to remember in coming weeks and months, especially in the context of upcoming new US tariffs against China. The Fed has always taken into consideration the global context, but it is obvious that this time it is a playing a dominant role. Like in his short testimony to Congress in early July, Powell used the words uncertainties and risk many times, putting very special attention on global trade developments, which constitutes a change compared to previous cycles.

  • There is still a lack of clarity from the Fed regarding where we are in the current business cycle. Powell cited 95 and 98 insurance rate cut examples like in past July, but this time there is no mention of “mid cycle adjustment”. This is a slight change, but it matters as evidence point out that we are not mid cycle, not even late cycle but rather at the end of the cycle. The Fed’s main goal is not to speed up growth, but to get in front of the inverted yield curve. Like it or not, the Fed has started a new easing cycle last month.

Market implications: the deadline of September 1st, when the US administration is expected to implement new tariffs against China, will increase pressure on the Fed to stimulate the economy. A 25 bps cut in September is a done deal and we may see another 25 bps cut by the end of the year (probably in December, following new tariffs against China and potential US retaliation against the European car industry).

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.