Fed's Powell Can Make Up for Markets After "Mid-Cycle Adjustment"

Federal Reserve Chairman Jerome Powell, this week has the opportunity to come to terms with the markets following a remark he made almost three weeks ago and which has caused a fall in stocks.

The central bank responded to investors' expectations with a quarter-point reduction in its interest rate on 31 July, which had all the characteristics of an insurance-type movement, as well as some indications that new moves were taking place. were possible if it was justified.

However, it was Powell's press conference that eventually cooled people's minds.

Responding to a question about the Fed's future intentions, he described the rate cut as a simple "mid-cycle adjustment," another among a series of memorable quotes from Powell since last October that left Wall Street in fashion. In this case, the market has taken its statement as an irreproachable indicator for future reductions.

So, when he will deliver his annual speech Friday at the Jackson Hole Symposium in Wyoming, Powell will have the opportunity, if not to come back on the "mid-cycle" assessment, and then provide the unless some further explanation of what this means.

One solution may be to emphasize that an adjustment can always mean multiple cuts.

"We believe that Powell will define the Fed as being in the process of an ongoing adjustment of interest rates that is not complete (not yet done) and that could go further than expected (not two maximum times), "according to economists Evercore ISI. Krishna Guha and Ernie Tedeschi said in a note to customers.

Change the speech into a scenario in which the Fed remains open to future cuts, though Mr Powell could also indicate that he does not see the risk of recession on the right track could be essential to calm a market climate very unstable.

As a result of the mid-cycle adjustment statement, the markets sold off, resulting in a decline of 333 points for Dow's industrial sector at the close of trading on July 31.

Powell's words are important because monetary policy has been left to soothe the tangled nerves in the light of the ongoing tariff battle between the United States and China.

Indeed, one day after the Fed meeting, the markets were in recovery mode, making up most of the previous day's losses. Then, in the afternoon of August 1, President Donald Trump announced his intention to put tariffs on all imports from China, thereby reducing inventories.

The unpredictability of the trade war, coupled with low inflation and a slowdown in the global economy, makes the Fed's position particularly precarious.

"We believe Jackson Hole's message will be that the committee is ready to extend the mid-cycle adjustment more anticipated than expected if it seems justified on the basis of a wide range of developments," wrote Guha and Tedeschi. They added that "the message planned for July has never been one-sided".

In fact, they see a possibility that the Fed will become even more aggressive if the signs of economic warnings become more pressing.

In such a scenario, economists see in a Fed that would "switch to an extremely aggressive rate reduction mode" in order to reduce the funds rate to zero and possibly proceed to additional rounds of buying Assets – quantitative easing – "if necessary."

Trump on Monday released a pair of tweets calling for similar actions. He called on the Fed to cut interest rates by one percentage point and revive its money printing program in times of crisis.