Powell opens up a September rate cut

Fed Chair Jerome Powell’s speech at the annual Jackson Hole symposium struck a dovish tone and has made a 25bps rate cut from the Federal Reserve at the September FOMC meeting more likely.

In his speech, Chair Powell noted that the Fed’s dual goals of maintain stable prices and maximising employment were in a “challenging situation” given that risks to inflation were still “tilted to the upside, and risks to employment to the downside.” He still described monetary policy as in restrictive territory and that the “baseline outlook and shifting balance of risks may warrant adjusting our policy stance.” That would suggest that the softer-than-anticipated jobs numbers for July are weighing more prominently at least in Powell’s thinking on the economy than the hotter inflation data for July that was released earlier this month.

Given that there remain risks in both directions, Powell diminished the likelihood of outsize moves lower from the Fed, noting that ‘the stability of the unemployment rate and other labour market measures allows us to proceed carefully.’

The September FOMC decision is likely to see a split vote among policymakers as two already voted for a cut at the July FOMC while other Fed officials have spoken out more cautiously about moving too quickly on easing rates when inflation risks remain salient. The composition of the Fed board of governors will be changing in coming weeks following the resignation of Andrea Kugler earlier in August. Stephen Miran, who currently chairs the Council of Economic Advisers, has been tapped by US President Donald Trump as Kugler’s replacement until at least her original term ends in late January 2026. His appointment could come as early as the first week of September, giving him time to vote at the next FOMC meeting.

There are still several key data points ahead—including inflation and jobs reports for August—and the risk of a good jobs number, upward revisions to the July nonfarm payrolls, or another batch of hot inflation data will keep markets and the Fed cautious on how quickly to cut for the rest of the year. Market pricing for the balance of 2025 is slightly more than 50bps of cuts or slightly greater than two cuts.

We now expect that the Fed will cut rates by 25bps at the September FOMC, taking the Fed Funds rate to 4.25% and that they will also cut at one additional meeting this year. For 2026 we expect 100bps of easing which will take the Fed Funds rate to 3.00% by end of the year.

Regional economies to get a boost

For economies in the GCC, the expected rate cuts will be an additional tail wind to growth as central banks will cut rates in line with the Fed. The economies of the UAE and Saudi Arabia in particular have shown robust non-oil growth even amid high rates and a lower rate profile will help to support growth.

Markets have responded positively to the imminent resumption of rate cuts from the Fed with the 2yr UST yield dropping almost 10bps overnight by the close on August 22 to 3.6963% while the US dollar index lost nearly 1%, keeping its year-to-date performance to a loss of almost 10%. A lower rate trajectory from September onward should also open up space for more regional credit issuance which has had a reasonably quiet several months.

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