Markets experiencing fluctuation as participants cautiously anticipate Jackson Hole event
The Federal Reserve is expected to initiate a series of interest rate cuts later in 2025, according to current market expectations and recent statements by Jerome Powell, the Federal Reserve Chair.
This shift in monetary policy comes after Powell acknowledged economic risks such as potential stagflation and labor market concerns during a speech at the Jackson Hole Symposium. As a result, major investment banks like Morgan Stanley, Barclays, BNP Paribas, and Deutsche Bank have revised their forecasts to reflect imminent rate cuts.
The current federal funds rate is around 4.5%, and it is expected to decrease to approximately 4.25% by the end of Q3 2025. The rate is projected to trend lower into 2026, with projections toward 3.75% in 2026 and 3.5% in 2027.
Despite expectations of Fed rate cuts, mortgage rates are projected to only fall modestly, remaining near or slightly above 6.5% through 2025 due to long-term inflation expectations and other market dynamics.
Traders have ramped up bets on a rate cut at the Fed's September 16-17 meeting, with 54 basis points of cuts priced in by year-end. The main focus is a speech by Fed Chair Jerome Powell on Friday.
Meanwhile, the dollar has been mixed on Tuesday. The dollar index is currently up 0.15% on the day, at 98.27. Sterling slipped 0.16% to $1.348, and the euro is down 0.12% against the dollar, at $1.1646. The dollar weakened 0.22% against the Japanese yen, to 147.54.
Traders are also awaiting the Federal Reserve's Jackson Hole Economic Policy Symposium later this week. The event will provide further insights into the Fed's monetary policy decisions.
In other news, U.S. President Donald Trump hopes Russian President Vladimir Putin will move forward on ending the war in Ukraine. Traders are also focused on any developments in peace talks to end the Russia-Ukraine war.
Bitcoin fell 2.88% to $113,112. A weak July jobs report and last month's consumer price inflation report showed limited upward pressure from tariffs. However, a hotter-than-expected July producer price reading has tempered some rate-cut expectations.
Vassili Serebriakov, an FX and macro strategist at UBS in New York, commented that the risks are more balanced now. He also stated that there has been a bit of de-risking in FX over the summer. Currency moves have been relatively muted for the past few weeks.
In summary, the Federal Reserve is poised to begin easing monetary policy after the Jackson Hole meeting, initiating gradual rate cuts starting in September 2025. However, these monetary easing moves are expected to be cautious and measured, with only modest short-term impacts on broader interest rates such as mortgages.
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