The ghosts of August 2007 and the time has come for rate cuts post Jackson hole

This week George Goncalves, MUFG Head of U.S. Macro Strategy, reviews the last major macro event that happened this past Friday, the Fed’s Jackson hole symposium. Specifically chair Powell’s opening speech acknowledged that the labor market cooling is unmistakably happening now (and in reality has been in our view for many quarters) and thus the Fed has pivoted to worrying about the jobs picture. As a result, chair Powell said the “time has come” to start adjusting policy rates lower (likely at the September meeting) to help combat further labor market weakness. Given that many of the conditions that have led up to this Fed pivot formed the basis for our house view for the better part of the year, we have not made major changes to our outlook for the Fed, economy, and markets. Prior to the event we already had increased our odds for larger rate cuts, where if the August NFP is weak, the Fed will likely start this easing cycle with 50bps. Meanwhile, this month has felt much longer than the typical August summer, George echoed back to another similarly long and volatile August, the August of 2007. George believes that the conditions are different to back then but the valuation setup is similar in terms of markets that are over-valued and sentiment very complacent. George argues that 2007 taught us to value liquidity and watch out for vol triggers.