Show Transcript
The U.S. Federal Reserve has delivered a half-point rate cut, its first in four years, taking its overnight rate to 5%. Scott Colbourne, Managing Director & Head of Active Fixed Income at TD Asset Management, speaks with Anthony Okolie about the size of the cut and the implications for markets and the economy.
Print Transcript
[AUDIO LOGO]
* The US Fed delivered a jumbo-sized 50-basis-point rate cut, its first in more than four years. Joining us with his reaction is Scott Colbourne of TD Asset Management. And, Scott, why 50 instead of 25?
* It was one of the most widely-anticipated Fed meetings in a long time. And the market, going into today's meeting, was really split between 25 and 50 basis points. And maybe there was a slight leaning towards 50 basis points.
* But the Fed has kicked off the big cutting cycle with a 50-basis-point cut, acknowledging that we have to get closer to its neutral rate, which is around 3%. And so the balance of risks have started to tilt towards a deteriorating labor market. So the Fed wanted to start the process and start it with a bang.
* And you mentioned that the markets were kind of leaning towards a 25-basis-point rate cut in the buildup to this. Again, there was speculation that the Fed wouldn't cut by 50 basis points because of the potential message it might send about the health of the US economy. So what message is the Fed sending?
* The Fed is normalizing policy and basically acknowledging that inflation has come a long way. And they're confident that it's getting closer to 2%. The Fed has a dual mandate, and it has to worry about the labor market. And we've seen a deterioration in the labor market.
* In the summary of economic projections in today's announcement, it has the unemployment rate at around 4.4%, and into next year around the same level. So it's acknowledging that the labor market has cooled. It was hot. But it doesn't want it to deteriorate.
* And Jay Powell, the Fed governor, basically said that at Jackson Hole-- look, we don't want any more cooling in the labor market. So we've got to get the Fed's fund rate from 5.5% to a level that is going to take into account some of this cooling in both inflation and the labor market.
* So, does this development-- does this change your outlook on the US economy?
* No. I think the Fed has done a tremendous job, the inflation shock and its reversal. It wants this soft landing to land, if you will. And it wants to continue economic growth.
* We've had Atlanta Fed GDP now around 3%, which is slightly above potential. It wants the growth to continue. It wants the labor market to continue to grow and not weaken more.
* So it's a very good news story. And, as I said, the Fed acknowledges that its long-term rate is closer to 3%. And at 5.5%, it's too tight for an economy that is close to potential on both employment, inflation, and growth.
* Talk a little about inflation. What do you see are the risks to the Fed after this decision today?
* The Fed has basically said, look, we're still in a data-dependent mode. They've got another 50 basis points of cuts priced in under its summary of economic projections. The market's leaning a little bit more.
* Look, we'll have to take each meeting and the collection of data that comes in-- if we see further deterioration in the labor market, we might get another 50-basis-point cut before the end of this year. But you can think over the arc of where we're going over the next year and a bit, we've got to get closer to 3%, which is its neutral rate.
* And over the course from 5.5% to 3%, that's about 10 cuts of 25 basis points. And it will recalibrate that meeting by meeting, based on the totality of data that comes in.
* Do you see a risk of inflation re-accelerating after this jumbo cut?
* Sure. The Fed is always mindful of both its dual mandates, right? And it's very confident right now, whether it's the market summary of expectations, which is closer to 2%. You've got a lot of data basically saying the labor market has cooled down.
* The risks to inflation are always there. And it acknowledges that both the risks are on the service side and with the shelter side. But on balance, they see that that's going to normalize over the next little while. And so they'll be mindful, but they expect to get closer to 2%.
* OK, so I want to talk about the US dollar. So given this jumbo rate cut, what does this potentially mean for the US dollar going forward?
* Well, the immediate reaction today we saw was a weaker dollar. And I think that continues on balance. The first half of this year, the broad US dollar accelerated about 6%-- 5% or 6%. And we've seen since about mid-June, a beginning of the normalization. And one of the leading currencies to normalize against the US dollar is the yen.
* The trend will continue. It benefits most currencies-- Aussie, CAD, kiwi. The yen will continue to normalize. The euro and sterling will benefit. So on balance, we'll continue to see a weakening in the US dollar as the Fed cuts.
* And so what will you be watching closely in the next few months as the Fed considers its next decision?
* I'm going to continue to watch the labor market. This was a real catalyst for a change in the governor's outlook for the outlook for interest rates and for the economy. And so the labor market is a key thing.
* We've just talked about risks of sticky inflation. Certainly, we'll be mindful of that. The big global backdrop-- we've continued to have a very weak economy in China and that sort of deflationary impulse.
* I'll be watching the commodity market for further signals that there is no more inflationary impulse. So all that will feed in, and that will help me decide how quickly the Fed will try to get back to about 3%.
* Lots to watch. Scott, thanks for joining us.
* My pleasure. Thank you.
[AUDIO LOGO]
[MUSIC PLAYING]
* The US Fed delivered a jumbo-sized 50-basis-point rate cut, its first in more than four years. Joining us with his reaction is Scott Colbourne of TD Asset Management. And, Scott, why 50 instead of 25?
* It was one of the most widely-anticipated Fed meetings in a long time. And the market, going into today's meeting, was really split between 25 and 50 basis points. And maybe there was a slight leaning towards 50 basis points.
* But the Fed has kicked off the big cutting cycle with a 50-basis-point cut, acknowledging that we have to get closer to its neutral rate, which is around 3%. And so the balance of risks have started to tilt towards a deteriorating labor market. So the Fed wanted to start the process and start it with a bang.
* And you mentioned that the markets were kind of leaning towards a 25-basis-point rate cut in the buildup to this. Again, there was speculation that the Fed wouldn't cut by 50 basis points because of the potential message it might send about the health of the US economy. So what message is the Fed sending?
* The Fed is normalizing policy and basically acknowledging that inflation has come a long way. And they're confident that it's getting closer to 2%. The Fed has a dual mandate, and it has to worry about the labor market. And we've seen a deterioration in the labor market.
* In the summary of economic projections in today's announcement, it has the unemployment rate at around 4.4%, and into next year around the same level. So it's acknowledging that the labor market has cooled. It was hot. But it doesn't want it to deteriorate.
* And Jay Powell, the Fed governor, basically said that at Jackson Hole-- look, we don't want any more cooling in the labor market. So we've got to get the Fed's fund rate from 5.5% to a level that is going to take into account some of this cooling in both inflation and the labor market.
* So, does this development-- does this change your outlook on the US economy?
* No. I think the Fed has done a tremendous job, the inflation shock and its reversal. It wants this soft landing to land, if you will. And it wants to continue economic growth.
* We've had Atlanta Fed GDP now around 3%, which is slightly above potential. It wants the growth to continue. It wants the labor market to continue to grow and not weaken more.
* So it's a very good news story. And, as I said, the Fed acknowledges that its long-term rate is closer to 3%. And at 5.5%, it's too tight for an economy that is close to potential on both employment, inflation, and growth.
* Talk a little about inflation. What do you see are the risks to the Fed after this decision today?
* The Fed has basically said, look, we're still in a data-dependent mode. They've got another 50 basis points of cuts priced in under its summary of economic projections. The market's leaning a little bit more.
* Look, we'll have to take each meeting and the collection of data that comes in-- if we see further deterioration in the labor market, we might get another 50-basis-point cut before the end of this year. But you can think over the arc of where we're going over the next year and a bit, we've got to get closer to 3%, which is its neutral rate.
* And over the course from 5.5% to 3%, that's about 10 cuts of 25 basis points. And it will recalibrate that meeting by meeting, based on the totality of data that comes in.
* Do you see a risk of inflation re-accelerating after this jumbo cut?
* Sure. The Fed is always mindful of both its dual mandates, right? And it's very confident right now, whether it's the market summary of expectations, which is closer to 2%. You've got a lot of data basically saying the labor market has cooled down.
* The risks to inflation are always there. And it acknowledges that both the risks are on the service side and with the shelter side. But on balance, they see that that's going to normalize over the next little while. And so they'll be mindful, but they expect to get closer to 2%.
* OK, so I want to talk about the US dollar. So given this jumbo rate cut, what does this potentially mean for the US dollar going forward?
* Well, the immediate reaction today we saw was a weaker dollar. And I think that continues on balance. The first half of this year, the broad US dollar accelerated about 6%-- 5% or 6%. And we've seen since about mid-June, a beginning of the normalization. And one of the leading currencies to normalize against the US dollar is the yen.
* The trend will continue. It benefits most currencies-- Aussie, CAD, kiwi. The yen will continue to normalize. The euro and sterling will benefit. So on balance, we'll continue to see a weakening in the US dollar as the Fed cuts.
* And so what will you be watching closely in the next few months as the Fed considers its next decision?
* I'm going to continue to watch the labor market. This was a real catalyst for a change in the governor's outlook for the outlook for interest rates and for the economy. And so the labor market is a key thing.
* We've just talked about risks of sticky inflation. Certainly, we'll be mindful of that. The big global backdrop-- we've continued to have a very weak economy in China and that sort of deflationary impulse.
* I'll be watching the commodity market for further signals that there is no more inflationary impulse. So all that will feed in, and that will help me decide how quickly the Fed will try to get back to about 3%.
* Lots to watch. Scott, thanks for joining us.
* My pleasure. Thank you.
[AUDIO LOGO]
[MUSIC PLAYING]
