Jay Powell is now ready to cut rates. It is an unequivocal message, and he is advising against any resistance to it. The direction of travel is clear.

The emphasis on preventing further cooling in the labor market from this point forward makes 50 basis point cuts much more likely. We should not rule out a 50bp cut in September, especially if the August payroll data continues to show weakness.

The initial reaction to Powell’s firm guidance on cutting is clearly dovish, with an evident pass-through to pro-cyclical bets in commodities. However, we find it premature to celebrate in risk assets and metals, given the upcoming events in September.

Ueda has paved the way for major divergence, and Powell has reinforced this, putting USD/JPY on a trajectory towards sub-140 levels on a trend basis. It is bad news for metals trade and bad news for risk assets as well. The carry trade is important for stability.

Is a cumulative 98bps reduction from the September-December meetings in the US excessive in this context?

It essentially implies three 25bp cuts plus a clear risk premium for a potential 50bp cut at one of the three meetings. This is not overly excessive, given the clear direction Powell has indicated and the warning that they will act swiftly if labor market data weakens further (i.e., if unemployment rises).

Chart 1: USDJPY versus real rates