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Mid-Cycle

22 August 2019 by jbchevrel

Yesterday the minutes showed most officials viewed the July cut as a ‘mid-cycle’ adjustment. Beyond that, those also confirmed the Fed’s cut aimed to (i) insure vs business invt/manufacturing/trade headwinds (ii) smooth potential external risks (iii) take inflation back to target. Since then, (i) Trump threatened fresh tariffs on last bucket of Chinese goods (ii) German data missed (iii) long-term market-based inflation expectations (to not say 5y5y break evens) kept going down, although stabilised in last sessions. Recent Fed speakers laid the ground for Powell’s speech at Jackson Hole tomorrow to be underwhelming, at least relative to the sizeable (~70bp) amount of cuts priced in before end of year (and ~5 full 25-bp cuts by end of next year). Daly (nv) earlier this week further stressed the July cut was a mid-cycle thing. George (v) repeated her position to dissent. Harker (nv) today said he reluctantly supported July cut, sounding like he wouldn’t support more. Against this backdrop, it looks like that Powell will repeat the ‘mid-cycle’ thing tomorrow at Jackson Hole (1500 BST). While he is probably going to keep the door open for more easing on Sept 18, the bar for him to ‘over-guide’ vs what $ OIS is pricing in seems high. Mester (nv / arguably more hawkish than Harker) was also rumoured to follow, tomorrow live on YF at 1630 BST. Although the past 12 months of the Fed’s policy don’t strike me as being particularly data-dependent, the key dates between JH and the meeting seem: the effective trigger of tariffs (Sep 1), ISM data (Mfg: Sep 3 Non-Mfg: Sep 5), jobs (Sep 6), inflation (Sep 12) and retail sales (Sep 13). Speaking about dependence, Psdt Trump had already twitted twice before midday today against the Fed, drawing a parallel between negative German yields including buxl and positive US rates.