FED: Cleveland's Hammack: Policy Very Mildly Restrictive, Concerns On More Cuts
Cleveland Fed President Hammack (hawk, 2026 FOMC voter) sounds extremely cautious about making further cuts: "I am laser focused on inflation. And that's why to me, I think that we should be very cautious in removing monetary policy restriction, because I think it's important that we stay restrictive to bring inflation back down to target." She says she she has "one of the highest estimates" of the neutral rate on the Committee, and thinks policy is only "very mildly restrictive after last week's move", so a "very short distance to neutral".
- "I do have more concerns right now that if we remove that restriction too quickly, yes, it may help on the labor side, but I feel like the labor side is still in a pretty good shape, and I'm really worried about what's going on with inflation."
- She's very likely one of the highest 2025 dots (possibly the 7 seeing no further cuts this year as of September), and, we would guess, one of the 6-8 highest submissions for end-2026 (who saw 3.6 or 3.9% rates). The three highest longer-run dots on the FOMC are 3.6%, 3.75%, and 3.9%, each of which was selected by one participant.
- Over the summer she described current policy as "modestly restrictive, and only very modestly restrictive", saying at Jackson Hole in August that "with the information I have, if the meeting was tomorrow, I would not see a case for reducing interest rates".
- She says that the "genesis" behind the Fed's decision to cut rates last week was that "the balance of risks has shifted". "With some of the recent data that we saw around the employment side, it felt like the pressure that we're seeing on the inflation side of our mandate and the pressure that we're seeing on the employment side, were coming into better balance."
- She says that "right now is a unique time for monetary policy" given challenges to both sides of its mandate. Inflation is "high and we're running in the wrong direction", with the labor market "right around full employment" at a "pretty healthy rate" of unemployment of 4.3%, but with recent payrolls data suggesting "more softness there" and there is "some fragility" in the labor market overall. But in other indicators also suggest less concern is warranted, with the environment being "low hiring, low firing".
- Among other concerns, Hammack says, tariffs could result in "another wave of price increases that are happening in the first and second quarter of next year" due to contracts that get negotiated at the start of the year.
- On recent inflation data, "Right now we're seeing pressure come back in the goods sector. It may be that it's just related to tariffs, but we don't know that just yet. But beyond that we're also seeing pressure in services inflation. And that's harder for me to attribute to the tariff policies as what's driving that... And so when I step back and think about it, what we have to worry about again is this magnitude and persistence of our misses. And on the inflation side, part of the persistence issue is that if inflation misses for too long and is expected to be missing for longer, that could start to impact inflation expectations."
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FED: NatWest Now Sees Cuts In 2025, Starting In September
As with Deutsche earlier, NatWest has changed its Fed call after the Powell Jackson Hole speech to reflect a 25bp September cut. Previously, the call was for no cuts in 2025. The new baseline outlook includes further 25bp cuts in December and March, bringing rates closer to neutral ("however, the changing composition of the committee becomes far less clear once Powell term expires in May").
- "While the August jobs and CPI reports will be watched carefully, it is clear to us that Powell has already seen enough to decide renewed action to counter downside economic risks is likely warranted, and so we now look for a 25 basis point rate cut on September 17th.
- "We expect officials will very much downplay the likelihood of a 50bp rate cut leading up to the jobs data, but we have to admit if the report is "weak enough" (e.g., the unemployment rate increases by 0.3pct to 4.5% (where officials had it at year end) anything can happen and wouldn't rule anything out. However, given the latest pivot and with financial markets pricing (86% of a 25bp rate cut) a lot has to happen (unemployment rate 3-handle and core CPI +0.5%) for the FOMC to undeliver and hold off from a rate cut in September. "
USDCAD TECHS: Bull Cycle Hindered
- RES 4: 1.4111 High Apr 10
- RES 3: 1.4019 38.2% retracement of the Feb 3 - Jun 16 bear leg
- RES 2: 1.3968 High May 20
- RES 1: 1.3925 High Aug 22
- PRICE: 1.3840 @ 16:55 BST Aug 22
- SUP 1: 1.3794 20-day EMA
- SUP 2: 1.3769/22 50-day EMA / Low Aug 22
- SUP 3: 1.3576 Low Jul 23
- SUP 4: 1.3557/40 Low Jul 3 / Low Jun 16 and the bear trigger
Gains this week in USDCAD and the breach of resistance at 1.3879, the Aug 1 high, marked a positive development, however the slippage into the Friday close undermines this sentiment - for now. Moving average studies have crossed and are in a bull-mode position, reinforcing current conditions. An extension higher would signal scope for a climb towards 1.4019, a Fibonacci retracement. On the downside, support to watch lies at 1.3769, the 50-day EMA - a level not yet challenged by the correction lower.
CANADA: Q2 Expected To See GDP Contraction, BOC's Estimate Looks Too Negative
The June retail sales release helps wrap up the last major data before Canadian Q2 GDP is released on Friday August 29.
- Current Bloomberg analyst consensus shows Q2 is expected to show a 0.7% Q/Q annualized contraction, versus +2.2% in Q1. The private sector consensus is more optimistic than the Bank of Canada's -1.5% estimate in its July Monetary Policy Report (which MNI thinks is too low) but the component-by-component breakdown is similar if of differing magnitudes.
- Widely expected are: a softening in household consumption growth (+1.2% in Q1), with a pickup in government spending, continued weakness in fixed investment (-3.0% in Q1) though with residential outperforming business capital formation, and a reversal of Q2's positive contribution from net exports. In short, the data are expected to confirm that trade activity was brought forward to Q1 ahead of tariffs, with the effects reversing in Q2.
- Going forward, the BOC envisages growth resuming in Q3 (+1.0% in its "current tariff" scenario). In the meantime, a weak Q2 reading could provide Governing Council with more conviction to resume easing rates in September, with the July meeting decision noting "If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate".
