Fed Speak Primer: Schmid, Bostic and Kashkari scheduled

Analysis details (12:32)

SCHEDULE (BST / EDT)

• 15:00 / 10:00: Fed's Schmid (2025 Voter, Neutral) to give opening remarks at a conference


• 15:40 / 10:40: Fed's Bostic (2024 Voter, Hawk) and Kashkari (2026 Voter, Hawkish) to speak on "Featuring Frontier Research to Enhance Economic Opportunity and Inclusive Growth"; No Text, but there will be Q&A..

PRIMER

• On Monday, Fed Chair Powell revealed that Fed is not in a rush to cut rates quickly, adding that providing the economy evolves as expected, there would be 50bps of easing through year-end, by cutting 25bps in November (7th) and 25bps in December (18th), an explicit push back against the need for another 50bps "jumbo" rate cut. Of course, if the labour market were to deteriorate by more than the Fed expects, they could still go ahead with such a move. The Fed will have more data to hand on Friday, after the release of the September NFP report, but there is still the October NFP report due before the November FOMC to help gauge the state of the labour market, which has been weakening recently. Others on the Fed, like Bostic, suggested that if employment growth slows much below 100k jobs, it would warrant closer questioning of what is happening. It is worth noting that with recent geopolitical escalations, it is something the Fed will be watching, particularly regarding implications for inflation if energy prices surge. 


• We have not heard from the Kansas City Fed president Schmid since the September FOMC, so we will be looking to see his views on the 50bp move given he is a non-voter, and his appetite for easing ahead. Schmid had preivously said in August he wanted to see more data before supporting a rate cut, warning the Fed could see a pickup in demand if they are not careful. 


• We have already heard from both Kashkari and Bostic several times, and based on the title of their speech, it is unlikely they will comment on monetary policy. However, if they do, we already know their views with Bostic open to another 50bp rate cut if the labour market shows an unexpected weakness, but he did reveal his dot plot only saw a single further 25bp rate cut in 2024, but he was cautious on 2025 with his 2025 dot more dovish than the Fed's median, but his neutral rate view is a touch above the median projection. Kashkari meanwhile was also in support of the 50bps rate cut in September, but noted both 25 or 50bps would have been reasonable. Kashkari's rate outlook is also in line with the Fed median for both 2024 and 2025. 

RECENT COMMENTARY

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  SCHMID (pre-Fed): Could still see a demand pickup if the Fed isn't careful, and payroll revisions do not change how he thinks about policy. Looking ahead, he needs to see more data before supporting a rate cut. On the labour markets, he added they have seen some cooling, but it is generally pretty strong. Continuing the Fed’s message, Schmid said he is going to let the data show where they go. If inflation continues to come in low, it will be appropriate to adjust policy, adding the current stance of Fed policy is not that restrictive and the Fed is close, but still not quite there on reaching the 2% inflation goal. He noted that financial conditions can impact the real economy, but the Fed must remain focused on its dual mandate. He is more confident that inflation is on the path to target, given recent encouraging inflation data. He noted that price data is volatile and that they should look for the worst in the data rather than the best. He acknowledged there has been a noticeable cooling of the labour market, but overall it still appears healthy, adding a cooling labour market is a necessary condition for easing inflation. Nonetheless, Schmid noted the story could change if conditions were to weaken considerably and the path of Fed policy will be determined by data and the strength of the economy. He would not want to assume any particular path or endpoint for the policy rate, however. Elsewhere, he noted there is room to reduce the balance sheet faster than the Fed is currently doing.


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  BOSTIC (post-Fed): In an exclusive Reuters interview, Atlanta Fed President Bostic said that he is open to another 50bp rate cut if the labour market shows an unexpected weakness. His baseline case is for an 'orderly' easing with inflation expected to continue slowing and the job market to hold up. He does not want to get overconfident on inflation given core PCE remains at 2.7%. However, the recent data does show that disinflation is still on track. Bostic added he will be watching upcoming jobs data closely, noting if employment growth slows much below 100,000 jobs, it would warrant closer questioning of what is happening, but he added that business contacts continue to note they do not expect layoffs. Regarding the Dot Plots, Bostic stated he pencilled in just a single further 25bp rate cut this year, beyond the 50bps in September. Meanwhile, his baseline outlook through the end of 2025 would see a policy rate between 3.00-3.25% (vs Fed median of 3.4%), a level that he believes would have a neutral impact on the economy (vs Fed median of 2.9%). In a separate speech, the Atlanta Fed President said that the economy is normalising more quickly than previously thought, so monetary policy needs to as well. Bostic supported the 50bps cut as a compromise between remaining uncertainty around inflation and risks to the job market. He also noted that the economy is effectively near conditions that would be considered normal, stressing a half point cut does not lock in a cadence for future rate cuts. On the mandate, Bostic said the Fed is now facing two "largely balanced" risks (vs Fed statement of "roughly in balance"). On the economy, he said that recent data shows him convincingly that the US is on a sustainable path to price stability, noting how price increases have narrowed and become concentrated in housing. He added the low recent levels of some recent inflation indicators portends well, noting how business leaders say pricing power has all but evaporated. On employment, he said the labour market is weakening, but it is not weak. Businesses are becoming more careful in hiring, but they are not considering layoffs. Bostic warned that risks to the labour market have increased, with the possibility of broad weakness higher than a year ago. Bostic added that the Fed is not in a mad dash to neutral and he is in favour of not rushing to judgment or assuming the job is done on inflation. Bostic also stated that he previously had been concerned that rate cuts would unleash pent-up demand, but that may be substantially less than thought, noting how levels of excess cash has diminished for many households, but some still have cash on hand and that could fuel demand. He expects choppiness on inflation going forward, and he will wait and see what is needed on rates, but if the labour market deteriorates, that is a reason for a faster pace to neutral, but that is not the baseline.


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  KASHKARI (post-Fed): Over two speeches, Kashkari noted that the balance of risks have shifted towards risk of further labour market weakening and higher unemployment. He said a 50bps rate cut was the right decision and reflects progress on inflation and softening of the labour market. He also told CNBC that he would not have argued against 25bps, noting that both 25 or 50bps would have been reasonable, and he thinks that 50bps was a judgement call, with the Fed policy still in a net-tight position. Kashkari's dot plot is in line with the median, seeing the policy rate at 4.4% at end-2024, and 3.4% at end-2025. When asked about neutral, he said there is a lot of uncertainty about where the Fed will cut to, but he is pencilling in a higher neutral rate than before the pandemic. He stressed it is still too soon to declare victory on inflation, but the disinflationary process appears to be on track. The Fed rate path will depend on the totality of incoming data. He acknowledged that policy remains tight, though it is uncertain on how tight it is, noting that signals on strength of the economy are confusing with GDP and consumer spending surprisingly resilient. However, there is little evidence that recessionary forces are building, or that inflation could surprise to the upside. Kashkari said he would love to get back to a 3.5% unemployment rate, noting how the labour market has not been driving inflation, and it is a lousy forecaster of inflation.

03 Oct 2024 - 12:32- Fixed IncomeData- Source: Newsquawk