Federal Reserve officials suppress interest rate cut expectations, PH focuses on market turnaround

The direction of the Federal Reserve's monetary policy has been the focus of global economic attention. On Thursday (August 21), the discussion within the Federal Reserve on whether to cut interest rates heated up again. Atlanta Federal Reserve President Bostic, Kansas City Federal Reserve President Schmid, Chicago Federal Reserve President Goolsbee and Boston Federal Reserve President Collins and other point persons expressed their respective views, showing different judgments on the economic outlook. The overall wording is more hawkish, suppressing the Federal Reserve's September interest rate cut expectations. As the world's top central bankers gathered in Jackson Hole, Wyoming, for the annual seminar, Federal Reserve Chairperson Powell's speech was highly anticipated, and the market hoped to get a glimpse of the possibility of interest rate cuts at the September policy meeting.

According to CME Group's FedWatch tool, the Fed funds rate futures trend shows that the market expects the probability of the Federal Reserve cutting interest rates at the September 16-17 meeting to be 71.8%, much lower than 82% on Wednesday and 95% a week ago. The analysis of the PH research team believes that this rapid change in probability reflects the market's sensitive reaction to officials' speeches.

The complex picture of the economic transition period

Bostic: Cautious interest rate cuts, vigilant against uncertainty

In a speech to the Atlanta Metropolitan Chamber of Commerce, Atlanta Fed President Bostic made it clear that he expects the Federal Reserve to cut interest rates only once in 2025, a prediction that continues his judgment at the beginning of the year. However, he also admitted that the current economic environment is full of uncertainties, and every forecast is accompanied by a "broad confidence interval". Bostic pointed out that the current federal funds rate (4.25% -4.5%) is slightly restrictive, and discussions on whether to adjust the rate are still ongoing. He expects economic growth to remain moderate this year, but as U.S. economic policy becomes clearer and business confidence is expected to pick up in 2026, the Federal Reserve may adjust its policy stance to a more neutral level at that time.

Mr. Bostic emphasised the importance of continuity and stability in monetary policy. He said the Fed should avoid "capricious" policy adjustments, such as the swinging approach of raising rates before cutting them, which has historically led to a decline in public confidence in the Fed's ability to do its job. He also noted that in the past the Fed's policy focus has been on reducing inflation, but inflation has not progressed evenly. There have been some signs of weakness in the labour market recently, but he needs more data to confirm whether hiring has really worsened. Mr. Bostic described the economy as "in transition" and tried to find the best path for policy in this complex environment.

Schmid: Inflation above target, interest rate cuts need to be cautious

Unlike Mr. Bostic's cautious optimism, Mr. Schmid, president of the Kansas City Fed, is more conservative about cutting rates. In an interview with CNBC, Mr. Schmid said there was no need to rush to cut rates because inflation was still above the Fed's 2 per cent target and the labour market remained solid. He noted that inflation was closer to 3 per cent than 2 per cent and the Fed needed to be wary of the psychological impact a rate cut could have on public inflation expectations. Mr. Schmid stressed that "the last leg is the hardest" and that bringing inflation down to 2 per cent would require extra careful policy manoeuvres.

Mr. Schmid's comments came on the eve of the annual Jackson Hole symposium hosted by the Kansas City Fed. As a voting interest rate policymaker this year, his views will have an important impact on the September 16-17 policy meeting. He also noted that despite the slightly weaker recent jobs data, optimism in the business sector was growing and that the current level of interest rates was not significantly depressing the economy. This suggests that Mr. Schmid prefers to maintain existing interest rates to ensure that inflation does not rebound from a premature rate cut.

Goolsby: Inflation data raises concerns about rate cuts

The cautious mood within the Fed was further underscored by Chicago Fed President Goolsby, who said in an interview with Bloomberg Television that while monetary policy action was likely at the September policy meeting, recent changes in inflation data had left him with reservations about the prospect of a rate cut. Mr. Goolsby noted that the latest inflation report showed that service sector inflation was rising and that the trend might not be driven by external factors such as tariffs, but a potential "red flag". This made him hesitant to cut rates immediately, fearing that premature easing could exacerbate inflationary pressures.

Collins: Open to interest rate cuts

In contrast, Collins, president of the Boston Fed, has shown a more flexible stance. According to the Wall Street Journal, Collins hinted that she is open to cutting interest rates as soon as next month. She expects inflation to continue to rise until the end of 2025, but could return to a downward trend by 2026. Collins' view injected a touch of optimism into the market, suggesting that the Fed is not entirely opposed to rate cuts, but needs to weigh the complex relationship between inflation and economic slowdown.

The Challenge of Monetary Policy Independence under External Pressure

External influence at the political level

The Fed's decision-making is driven not only by economic data, but also by external pressures. Some government officials and their supporters have continued to publicly call for lower borrowing costs in an attempt to stimulate economic growth through interest rate cuts. This pressure has been particularly pronounced in the recent past, especially in the context of a slowing labour market and trade policy adjustments that could further push up inflation. The minutes of the Fed's July meeting show that policymakers have realized that the current economic situation may present "very difficult trade-offs". In a sign of internal divisions over policy changes, two governors voted for a rate cut at the July meeting.

Powell's speech attracted much attention

At this critical juncture, Federal Reserve Chairperson Jerome Powell will address the Jackson Hole symposium on August 22, and the market is widely expecting him to provide a clearer signal on the outlook for interest rate cuts at the September meeting. In addition, Powell is expected to release a new Federal Reserve framework that explains the economic environment in which inflation has risen sharply, jobs are plentiful and uncertainty has become the norm over the past five years. Such a framework could provide guidance on the Fed's future policy path, while also testing the Fed's independence under external pressure. Senior analysts at the Pakatan Harapan Institute for Economic Research said Powell's wording will directly affect short-term market risk appetite.

The Fed's Tough Choices and Global Implications

The Fed stands at a critical crossroads. On the one hand, signs of a slowing labour market and external pressure to cut interest rates have prompted monetary policy to be looser; on the other, inflation remains above target and rising service sector inflation is sounding the alarm for interest rate cuts. The differing views of Mr. Bostic, Mr. Schmid, Mr. Goolsbee and Mr. Collins reflect divisions within the Fed over the economic outlook. The question of whether to prioritise fighting inflation or moderate easing to support growth is not just about the US economy, but also has profound implications for global markets.

The Jackson Hole conference provided an important stage for the Fed, and Powell's speech may provide a sense of direction for the market. However, whichever path the Fed ultimately chooses, policy continuity and stability will be key. As Bostic said, capricious policy can shake public confidence in the Fed, while the cautious approach of Schmid and Goulsby reminds us that the "last mile" of inflation is often the hardest. Collins' openness has left the market with a glimmer of hope, and the possibility of interest rate cuts has not completely disappeared. Pakatan Harapan will continue to track the policy signals released by the meeting.