Powell Confirms a September Fed Rate Cut

Electricity generation from solar farms is growing faster in Central and Eastern Europe than in any other European region, vastly exceeding the growth rates seen in both wealthier and sunnier parts of the continent.

Through the first seven months of 2024, utility-run solar output in the five largest solar producers in Central/Eastern Europe - Austria, Bulgaria, Hungary, Romania and Poland - jumped by 55% from the same months in 2023, data from Ember shows.

That's over twice the growth rate for Europe as a whole, and sharply exceeds the paces posted by the five largest solar generators in Western Europe, Southern Europe and Northern Europe over the same period.

Central and Eastern Europe's top five solar producers have also expanded solar generation capacity faster than regional peers since 2019, paving the way to continued solar output growth in one of Europe's most heavily industrialized areas.

Poland and Hungary are by far the most important drivers of utility-scale solar growth in Central/Eastern Europe.

Through the first seven months of the year, solar-powered electricity generation in Poland was 11.3 Terawatt hours (TWh) and was 5.8 TWh in Hungary.

Those output figures were up 33.3% and 47.7%, respectively, from the same periods in 2023, according to Ember, and rank among the fastest growth rates in all of Europe.

In absolute generation terms, those output figures also rank highly among European peers.

Indeed, the five largest solar producers in the Central/Eastern European region boosted collective solar-generated electricity by just 10% less so far this year than the five largest solar producers in Western Europe - Belgium, France, Germany, The Netherlands and Switzerland.

The ability of nations across Central/Eastern Europe to compete with wealthier economies in Western Europe in terms of solar growth underscores how affordable solar installations have become relative to other forms of electricity generation.

The rapid growth in solar generation in Central/Eastern Europe also reflects supportive clean energy policies across the region, which has historically been one of Europe's heaviest coal-burning regions.

Both Poland and Hungary - the region's two largest solar producers - have targeted net zero carbon emissions in power generation by mid-century, and plan aggressive further expansions in clean energy generation.

In absolute generation terms, the five largest solar producers in Central/Eastern Europe still rank a distant third in the region behind the five largest solar producers in Western and Southern Europe.

Through the first seven months of 2024, Western Europe's largest solar producers generated 83.53 TWh of electricity, while Southern Europe's five largest solar producers - Greece, Italy, Portugal, Spain and Turkey - generated 76.12 TWh, Ember data shows.

The 25.2 TWh of solar electricity generated by Central and Europe's five largest solar producers looks small comparatively.

However, over the past three years the Central/Eastern European region has boosted solar generation by roughly 49% a year, which dwarfs the 19% annual growth pace for Europe as a whole, the 16% pace of Western Europe, and the 21% for Southern Europe.

If those growth rates were sustained for the rest of this decade, the generation total by the five largest Central and Eastern solar producers would surpass that of their peers in Western Europe in 2029 and those of Southern Europe in 2030.

The largest solar producers in Central/Eastern Europe already produce 76% more solar electricity than their peers in Northern Europe (Denmark, Finland, Lithuania, Sweden and the United Kingdom), and look primed for further aggressive solar growth across the region.

Operations at the 60 megawatt (MW) capacity Tapolca solar farm in western Hungary began in late July, and will supply roughly enough electricity for 30,000 households annually, according to developer Enlight.

And in Poland, a new 40 MW project developed by Lightsource BP commenced operations last month.

The region's largest project, however, is the 400 MW farm in Apriltsi, Bulgaria, which boasts over 800,000 photovoltaic panels and is designed to supply electricity not just to Bulgarian customers but across Eastern Europe.

And beyond being one of the biggest solar parks in Europe, the Apriltsi project is also significant for the height of its panels, which at 2.2 meters (7.2 feet) allow for the land below to be used for agriculture purposes.

Further so-called agrivoltaic projects are being trialled in Turkey and Poland, and look set to yield additional clean electricity generation with only limited impact the region's farmland.

And given the strong local policy support for traditional solar already in place, the successful deployment of more agrisolar projects could help the Central/Eastern Europe region gather even more solar generation momentum in the years ahead.

US Vice President Kamala Harris might be riding a wave of momentum heading into her acceptance speech as the Democratic Party's presidential nominee on Thursday, but the economy remains the paramount issue in this year's race.

"This election, the outcome is going to be determined by how people vote with their wallets based on inflation," Ryan Sweet, chief US economist at Oxford Economics, told reporters last week.

According to an ABC News/Washington Post/Ipsos poll, her Republican rival Donald Trump holds a nine-point lead when it comes to who Americans trust more to handle the economy and inflation. Meanwhile, a poll released by the Financial Times and the University of Michigan Ross School of Business showed Ms. Harris with a one-point advantage.

The election's outcome will have significant effects on the economy with the Federal Reserve's inflation battle still being fought and the expiration of Mr. Trump's tax cuts next year that will be fiercely debated in Congress.

Both candidates have been on the campaign trail in the past week laying out their agendas – Ms. Harris with an appearance last Friday in North Carolina, and Mr. Trump with a speech in the battleground state of Pennsylvania on Monday.

The inflation scenario varies, with economists agreeing Mr. Trump's protectionism and immigration policies will stall progress in restoring price stability.

Mr. Trump has recently proposed a 10 per cent tariff on all US trading partners – as well as a 60 per cent tariff on Chinese goods – as a replacement to income taxes.

A recent paper from the Peterson Institute of International Economics said higher tariffs would harm US exports and diminish economic growth, while also leading to higher inflation. A separate study by the Lombard Odier Group predicts that a Trump presidency and a Republican-controlled Congress would also stall inflation, forcing the Federal Reserve to halt cutting interest rates at around 4 per cent.

"In the event of a Trump presidency with a divided Congress, the impact of tariffs would likely dominate, slowing growth while still increasing inflation," the group wrote in its latest CIO Office Viewpoint.

The current target range for US interest rates is 5.25 to 5.50 per cent.

Bond yields would also probably rise, and so would the US dollar against the euro, the organisation said. The company expected a Harris-led presidency to have greater policy continuity should she succeed Mr. Biden, with the Fed cutting rates through mid-2025.

Changes to the Fed's monetary policy will have implications for most central banks in the Gulf Co-operation Council, whose currencies are pegged to the US dollar.

"Any drop in the benchmark interest rates or higher-for-longer scenario will have an impact on interest rate-sensitive sectors in the GCC like banking, real estate, utilities as well as leverage companies," said Faisal Hasan, chief investment officer at Al Mal Capital in Dubai.

"The investors here are also very international [in their focus] and changes in the monetary policy will impact their investment."

Tariq Qaqish, chief executive at the Salt Fund Placement advisory firm in Dubai, said GCC countries must prepare for both administrations.

Mr. Qaqish anticipates a Trump win would lead to a weaker dollar, thereby increasing liquidity into the region. A Harris win, he said, would lead to a stronger US dollar which would hamper economic growth.

Regardless of who wins the 2024 election, the US federal deficit is expected to further increase.

The International Monetary Fund has warned that high fiscal deficits and the continuing increase in the debt-to-GDP ratio are not only a risk for the US, but also the global economy.

Ms. Harris last week released some elements of her economic agenda, including expanding the child tax credit base from $2,000 to $3,000, expanding the earned income tax credit, advancing a federal ban on price-gouging on groceries and providing a tax credit of up to $25,000 for first-time homebuyers.

These and other plans make up the elements of the Agenda to Lower Costs for American Families, which outlines her intentions for her first 100 days in office.

All told, the plan would increase the US federal deficit by $1.7 trillion over a decade, according to the bipartisan Committee for a Responsible Federal Budget (CRFB). That figure would rise to $2 trillion if the housing policies became permanent.

Mr. Trump has thus far not released a detailed economic agenda. The CRFB in July estimated that his plans to eliminate taxes on Social Security benefits would increase deficits by $1.6 trillion to $1.8 trillion through 2035.

The national debt also soared during Mr. Trump's term in office.

According to another analysis conducted by the CRFB, Mr. Trump added $8.4 trillion to the national debt. Of that, $3.6 trillion was from Covid relief laws.

A second Trump term would likely be a continuation of the Make America Great Again agenda that defined his first term, where he wants further tax cuts and enhancing US industries, Mr. Qaqish said.

"These policies could stimulate growth but will put more pressure on fiscal deficits," he said, adding that geopolitical factors must also be considered. Should Mr. Trump win and negotiate a ceasefire between Russia and Ukraine, as well as a peace deal between Israel and Palestine, then Mr. Qaqish expects a lower level of government spending and national debt.

In one major policy shift, Ms. Harris's campaign said her administration would lift the US corporate tax rate to 28 per cent from its current rate of 21 per cent. The campaign's proposal is in line with President Joe Biden's most recent budget proposal.

Mr. Qaqish said this would have a direct impact on investors, who would establish businesses outside the US to reduce their corporate taxes.

Mr. Trump cut the corporate tax rate from 35 per cent to 21 per cent as part of his 2017 tax plan, and pledged to further cut taxes if he was elected president again. Mr. Trump's tax plan brought the US's corporate income tax rate down from the fourth-highest in the world to roughly median, according to the Tax Foundation.

The non-partisan Congressional Budget Office (CBO) in 2018 said raising the current corporate tax rate by one percentage point would raise US revenue by $96 billion from 2019 to 2028.

Mr. Trump's tax plan is set to expire at the end of next year, and will be one of the biggest issues facing Congress when the new session begins.

Extending the tax cuts would add $3.3 trillion to the US deficit over the next 10 years, the CBO said.

September S&P 500 E-Mini futures are up +0.51%, and September Nasdaq 100 E-Mini futures are up +0.60% this morning as market participants awaited Fed Chair Jerome Powell’s Jackson Hole speech for more clues on the amount and timing of interest rate cuts. 

In yesterday’s trading session, Wall Street’s major indexes ended in the red. Snowflake tumbled over -14% after the company reported weaker-than-expected Q2 billings and provided Q3 product revenue guidance that failed to impress investors. Also, chip stocks lost ground, with Intel slumping more than -6% to lead losers in the Dow and Advanced Micro Devices falling over -3%. In addition, Urban Outfitters slid more than -9% after reporting weaker-than-expected Q2 retail comparable sales growth. On the bullish side, Zoom Video surged about +13% after the company posted upbeat Q2 results and raised its full-year guidance.

Economic data on Thursday showed that the U.S. S&P Global manufacturing PMI fell to an 8-month low of 48.0 in August, weaker than expectations of 49.5. Also, the number of Americans filing for initial jobless claims in the past week rose +4K to 232K, in line with expectations. At the same time, the U.S. August S&P Global services PMI unexpectedly rose to 55.2, stronger than expectations of 54.0. In addition, U.S. existing home sales increased +1.3% m/m to 3.95M in July, stronger than expectations of 3.94M.

“The U.S. economy overall has, thus far, been robust enough to take an extended Fed rate pause,” said Don Rissmiller at Strategas. “But there’s a clear case for rate cuts soon.”

Boston Fed President Susan Collins stated on Thursday that it would soon be appropriate for the U.S. central bank to start a rate-cutting cycle. “I think a gradual, methodical pace once we are in a different policy stance is likely to be appropriate,” Collins said. Also, Philadelphia Fed President Patrick Harker said that upcoming economic data will guide the appropriate magnitude of the Fed’s first interest rate reduction. “In September, we need to start a process of moving rates down,” Harker said. At the same time, Kansas City Fed President Jeffrey Schmid stated that he wants to see more economic data before backing any decision to start lowering interest rates. “I still think we could see a little bit of a demand pickup if we’re not careful with the decisioning,” Schmid said.

Meanwhile, U.S. rate futures have priced in a 75.5% probability of a 25 basis point rate cut and a 24.5% chance of a 50 basis point rate cut at the September FOMC meeting.

Today, all eyes are focused on Fed Chair Jerome Powell’s address at the central bank’s annual economic symposium in Jackson Hole, Wyoming. Market participants will be keenly focused on what he indicates about the pace and timing of rate cuts in the coming months.

On the economic data front, investors will focus on U.S. New Home Sales data, set to be released in a couple of hours. Economists, on average, forecast that July New Home Sales will stand at 624K, compared to the previous figure of 617K.

The U.S. Building Permits data will also be reported today. Economists expect July’s figure to be 1.396M, compared to 1.454M in June.

In the bond market, the yield on the benchmark 10-year U.S. Treasury note is at 3.857%, down -0.13%.

The Euro Stoxx 50 futures are up +0.33% this morning as investors digested dovish comments from a European Central Bank official and looked ahead to Fed Chair Jerome Powell’s speech at the Jackson Hole Economic Symposium. Automobile stocks gained ground on Friday, while technology stocks slumped. France’s statistical agency Insee reported Friday that the nation’s business climate indicator improved in August. Meanwhile, ECB policymaker Martins Kazaks stated on Friday that the central bank could potentially lower interest rates two more times this year as inflation continues to follow the downward trajectory that policymakers anticipated. “We are broadly along the baseline of our projections and that is consistent with a gradual decline in interest rates,” Kazaks said. In corporate news, Nestle Sa dropped more than -2% after the Swiss food group announced that CEO Mark Schneider would be replaced by company veteran Laurent Freixe following a period of lackluster performance.

France’s Business Survey was released today.

The French August Business Survey came in at 99, stronger than expectations of 96.

Asian stock markets today settled in the green. China’s Shanghai Composite Index (SHCOMP) closed up +0.20%, and Japan’s Nikkei 225 Stock Index (NIK) closed up +0.40%.

China’s Shanghai Composite Index closed higher today, snapping three consecutive days of losses as risk sentiment improved following the housing regulator’s pledge to accelerate the purchase of unsold homes and turn them into affordable housing. Automobile, technology, and insurance stocks outperformed on Friday. Vice Minister of Housing and Urban-Rural Development Dong Jianguo stated in a briefing in Beijing on Friday that the country will rapidly implement a program to buy unsold apartments and convert them into affordable housing. Dong also said that the government will advance the renting and selling of public housing units as soon as conditions are favorable. Meanwhile, China’s Commerce Ministry convened a meeting on Friday with automakers and industry associations to discuss increasing import duties on large-engined gasoline vehicles, sounding an alert as the European Union approaches a tariff decision on Chinese electric cars. In corporate news, NetEase plunged over -10% in Hong Kong after the gaming firm reported weak Q2 results. At the same time, Ping An Insurance gained more than +3% after posting its best half-year performance in four years. Market participants are now awaiting the People’s Bank of China’s decision on the medium-term lending facility early next week after benchmark lending rates were kept steady in August.

Japan’s Nikkei 225 Stock Index closed higher today, reversing losses from earlier in the session even as the yen strengthened after Bank of Japan Governor Kazuo Ueda indicated that the central bank remains on track to raise interest rates. Healthcare and materials stocks led the gains on Friday. Government data released on Friday revealed that Japan’s core consumer prices accelerated for the third consecutive month to 2.7% in July, marking the highest level since February. Meanwhile, BOJ Governor Kazuo Ueda stated that the central bank will continue to aim for further interest rate hikes if the economy and inflation progress according to its projections. “There is no change to our basic stance of adjusting the level of monetary easing going forward if we can confirm that the outlook for the economy and prices is more likely to realize as we expect,” Ueda said in a parliamentary session Friday. Ueda added that the central bank will continue to monitor movements in the financial markets “with a high sense of urgency,” as they remain volatile. In corporate news, Sharp Corp. climbed about +7% after a report indicated that SoftBank Corp. was in discussions to make a 100 billion yen ($686.72 million) investment in the electronics manufacturer. The Nikkei Volatility, which takes into account the implied volatility of Nikkei 225 options, closed down -6.45% to 25.38.

The Japanese July National Core CPI has been reported at +2.7% y/y, in line with expectations.

Workday surged over +11% in pre-market trading after the back-office software provider reported stronger-than-expected Q2 results and announced a $1 billion stock buyback plan.

CAVA Group climbed more than +9% in pre-market trading after the company posted upbeat Q2 results and raised its full-year guidance for adjusted EBITDA and same-restaurant sales growth.

Ross Stores advanced over +5% in pre-market trading after the company reported better-than-expected Q2 results and raised its FY24 EPS forecast.

The highly anticipated annual central bank conference - the Jackson Hole Economic Symposium - commenced on August 22 for a three-day duration. The complete agenda was released at 8 p.m. New York time on August 22. Each year, the schedule has some variations, but it typically includes panel discussions featuring central bank governors from around the globe, alongside officials from international organizations such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). This year's theme, "Reassessing the Effectiveness and Transmission Mechanisms of Monetary Policy," underscores the significance of the event, particularly within the context of global economic recovery from the COVID-19 pandemic, elevated interest rates, and geopolitical tensions.

However, this year's "Global Central Bank Annual Meeting" appears to lack substantive participation, with only the Federal Reserve Chairman and the Governor of the Bank of England (BOE) confirmed to attend and speak. Notably, European Central Bank (ECB) President Christine Lagarde is expected to miss this year's meeting, with her place being taken by the ECB's Chief Economist, Philip Lane.

Powell will deliver a speech regarding the economic outlook via livestream, which is typically regarded as a keynote address. Bailey will present the luncheon speech, while Lane from the ECB is set to participate in a review panel discussion on Saturday, possibly engaging in dialogue with central bank governors from emerging markets and leaders of international organizations. Although Bank of Japan Governor Kazuo Ueda participated in panel discussions last year, he has been requested to attend a parliamentary meeting on the 23rd this year, and thus will not be present.

The most highly anticipated event is undoubtedly the address by Fed Chairman Powell, as he usually clarifies the "medium-term policy trajectory" during such meetings, even in the absence of actual policy announcements (for instance, during Bernanke's term, he would "forecast" new policies). This speech will also outline future areas of concern.

In recent years, the Fed has made erroneous assessments at crucial moments, but following a period of "reflection," it is evident that there has been "progress" in this regard.

During the tumultuous repurchase market of 2019, the Fed's interest rate management range once went out of control, ultimately requiring the revival of repurchase tools to provide liquidity. Notably, in his speeches that year, Powell failed to mention any aspect of the money market. The Fed's policy communication was heavily criticized, as reflected in a market survey conducted by the New York Fed, where only one primary dealer deemed the Fed's communication "relatively effective." Meanwhile, eight found it "average," eleven categorized it as "very ineffective," and four dismissed it as having "no (or low) effectiveness." Among the twenty-eight surveyed market participants, eight described the Fed's communication as "relatively effective," five considered it "average," seven labeled it as "very ineffective," and another seven identified it as having "no (or low) effectiveness," with only one participant rating it as "very effective."

The speech from 2020 was closely related to the adjustments in the Fed's framework at that time, establishing a foundation for monetary policy over the next decade. During his address, Powell extensively discussed the impact of the low productivity, low inflation, and low unemployment since the 2008 financial crisis on monetary policy. He referenced the well-explored concept of the flattening of the Phillips Curve, which seemingly justified the Fed's shift toward an average inflation-targeting regime. However, Powell clearly overlooked the onset of the pandemic in the same year and the aggressive shifts in fiscal policy. In reality, the post-pandemic era has numerous structural challenges for the labor market, while inflation has become exceptionally high and uncontrollable, making it difficult for the new framework to adapt to the current economic landscape and labor market conditions. Consequently, discussions on average inflation targeting had largely fallen by the wayside, and the highly politically correct notion of a "broad employment objective" within the new framework has become nearly forgotten.

By 2021, when the meeting convened, inflation in the U.S. had already begun to rise, while fiscal stimulus efforts continued at a significant scale from 2020. In his speech, Powell emphasized that "inflation is transitory", attempting to substantiate this claim with five key arguments and extensive elaboration to convey that inflation was manageable within the Fed's control and that a decrease would occur by the year's end. The subsequent developments are well-known; not only did inflation fail to decline, but it continued to rise.

In the 2022 speech, it was evident that Powell learned from previous experiences, particularly from 2021, and firmly established a notably hawkish tone regarding the "medium-term policy path," characterized by "slower, longer, and higher."

Fed Chairman Powell underscored the necessity of addressing inflation while also noting the deceleration of the labor market and economic growth. Many developments aligned with expectations; however, the requirement to maintain interest rates below 4% by 2023 seems to be significantly at odds with the current rate levels in the context of employment elasticity.

Overall, the decisions made by the Fed appear to be correct. Therefore, this meeting has humorously been dubbed the "Fed's moment of self-reflection." It is worth mentioning that the theme of the Jackson Hole Economic Symposium in 2022 was "Reassessing Constraints on the Economy and Policy," which closely resembles this year's theme.

In 2023, the persistent inflationary pressures, uncertainties surrounding the economic recovery process, and fluctuations in the global economic environment have set the primary tone. During this meeting, Powell's remarks predominantly focused on inflation and the economy, while also underscoring the importance of maintaining a hawkish stance and not ruling out the possibility of future interest rate hikes. Overall, there is greater caution regarding the approach to inflation.

Whether the Fed's policy in 2023 is "correct" depends on whether inflation has effectively come down, but also takes into account the performance of economic growth and the job market. From the current point of view, it is undoubtedly correct.

Since the beginning of this year, the Fed has faced a number of challenges. Initially, inflation showed signs of rebounding, leading both the market and the Fed to view this as merely a "bump" in the disinflation process. However, after three consecutive months of increasing inflation, market sentiment began to shift - from perceiving it as a "bump" to acknowledging a rebound in inflation, then recognizing a stall in the disinflation efforts, and ultimately interpreting it as a reversal in inflation trends. Fortunately, starting from the April CPI, the market gradually began to believe that the disinflation process was progressing sustainably.

However, just as the inflation issue seemed to be resolving, complications arose in the labor market. The unemployment rate in the non-farm payrolls for May and June began to climb, reaching 4.3% in July - the highest level since October 2021, and almost triggering the "Sahm Rule." According to the Sahm Rule, if the unemployment rate (based on a three-month SMA) rises by 0.5 percentage points above its low from the previous year, a recession has begun. This indicator has accurately predicted economic downturns 100% of the time since 1970. Consequently, concerns over a potential recession began to permeate the market. The Fed explained that the rise in the July non-farm unemployment rate was likely attributed to an increase in the labor force population coupled with a decrease in hiring demand. It was only through comments from several Fed officials and the recent positive performance of various economic data that worries about a recession began to dissipate.

Throughout this process, whether dealing with inflation or labor market issues, the Fed has been actively guiding expectations through "expectation management." However, despite these efforts, the market still anticipates a 100-basis-point rate cut by the Fed by the end of the year. Judging from the speeches made by two FOMC officials at the Jackson Hole Economic Symposium yesterday, one supports a rate cut, while the other agrees with discussing the magnitude of the cut.

Boston Fed President Susan Collins stated that it would soon be appropriate to start cutting rates to help maintain a still-healthy labor market.

Philadelphia Fed President Patrick Harker mentioned that upcoming economic data in the next few weeks will help determine the appropriate magnitude of the first rate cut. He emphasized the need to review several weeks of data before deciding whether a 25 or 50 basis point rate cut is warranted in September.

From these two officials' remarks, it appears that the Fed has reached a consensus internally on the timing of rate cuts, but there is still disagreement over the magnitude of the cuts. This is one of the main reasons the market is focusing so closely on Fed Chair Jerome Powell's speech.

Considering the Fed's performance in the last two meetings and its recent attitude, Powell's speech might not be as hawkish as the market expects, as the market often likes to "jump the gun," which is not what Powell wants to see. Another piece of evidence supporting this is the previous remarks made by the two officials—one hawkish and one dovish (relatively speaking)—which seems to serve as a "precaution" for the market.

The market might hear more comments similar to those made in early August, such as avoiding reactions to single-month data and continuing to observe the broader trends. Key data like the PCE (Personal Consumption Expenditures) and the August non-farm payroll report will be released shortly after the Jackson Hole Economic Symposium, which may emphasize the need to wait for these data before deciding on the extent of easing required.

Simultaneously, there might be assurances that if the economy takes a more severe downturn, the Fed is prepared to act swiftly.

In summary, Powell might not be ambiguous about the direction but will indicate that the speed and timing of rate cuts will depend on the data between now and the next meeting. According to the minutes from the July meeting, unless unexpected events occur, the "vast majority" of members support a rate cut in September. The remaining question is whether the cut will be 25 or 50 basis points. This is actually somewhat predictable, with regional Fed Presidents like Harker being reluctant to reveal specifics, let alone Powell.

There are other clues suggesting that a 50 basis point rate cut might be feasible. Although the U.S. economy is currently weakening, the real economy has not yet experienced a crisis. At the same time, considering the risk of inflation possibly rebounding—especially as the economy may further recover after a rate cut—the Fed might still be concerned about inflation rising again. Therefore, the Fed may take a more cautious approach, opting for a 25 basis point cut as an initial move, rather than being too aggressive at the outset.

However, from the perspective of benefiting the economy and financial markets, a larger 50 basis point cut might be more advantageous. A key question regarding the current understanding of the U.S. economy is: Why hasn't the U.S. economy entered a recession after such a rapid rate hike to high levels? So far, there hasn't been a substantial financial recession in the U.S. The main reason behind this is that financial institutions and the government have protected the household and corporate sectors by taking on risks themselves. Therefore, during the entire rate hike process in the U.S., the accumulated risk has been more financial rather than a risk to economic growth.

The current liquidity in the U.S. is not lacking; it's just that the cost of funds is relatively high. Based on this, we believe that a more substantial, preventive rate cut would be more effective in alleviating financial risks. Otherwise, high interest rates might not truly resolve the risks.

This is why some officials, such as Harker, are open to a 50 basis point rate cut. In theory, the current environment in the U.S. supports a 50 basis point rate cut by the Fed, but due to uncertainties, in practice, the Fed might lean towards a more cautious 25 basis point cut as a more realistic initial step.

Additionally, as mentioned earlier, the Fed has made misjudgments during this economic cycle, mainly in underestimating the persistence of inflation in its early stages. Powell initially believed that inflation was temporary, but it turned out he was wrong. Late last year and early this year, the Fed thought that inflation had dropped to a level where rate cuts could be considered, but subsequent events proved this judgment wrong again. In other words, the Fed's misjudgments have more to do with the resilience of the economy rather than whether it has entered a recession. The robust growth of the U.S. economy in this cycle has actually given the Fed considerable confidence.

Although there has been a slight deterioration in the employment situation, it is unlikely to evolve into a large-scale recession. Therefore, discussing whether it is too late to cut rates might be inaccurate. Employment data from the first or second quarter, or even GDP growth, were somewhat overheated. The Fed might choose to delay the rate cut and proceed cautiously.

Even if a rate cut occurs in September, it might be more of a preventive measure rather than a crisis response. With non-farm payrolls not showing a sharp decline and the Fed still having substantial policy space, the notion of a rate cut being too late might not hold. Instead, the market’s anticipation and demand for a rate cut might be premature.

As for the impact on the U.S. Dollar Index, it is expected to decline, but the drop may be limited. Although Powell might clarify the policy direction at this meeting, the market has already priced this in. Considering the market's tendency to anticipate prematurely, Powell might be more cautious in his wording, which could disappoint some investors who are looking for signs of a 50 basis point rate cut. This could provide upward momentum for the dollar, but ultimately, due to a clear policy direction, the dollar index is likely to end lower.

Last week, Fitch Ratings downgraded Israel's credit score from A+ to A. Fitch cited the continued war in Gaza and heightened geopolitical risks as key drivers. The agency also kept Israel's outlook as "negative", meaning a further downgrade is possible.

After Hamas's deadly attack on October 7, Israel's stock market and currency nosedived. Both have since bounced back. But concerns about the country's economy persist. Earlier this year, Moody's and S&P also cut their credit ratings for Israel.

So far, Israel's war on Gaza has killed more than 40,000 Palestinians and decimated the economy in the besieged Palestinian enclave.

There are signs of a blowback in Israel, too, where consumption, trade and investment have all been curtailed.

Separately, Fitch warned that heightened tensions between Israel and Iran could incur "significant additional military spending" for Israel.

The Bank of Israel has estimated that war-related costs for 2023-2025 could amount to $55.6bn. These funds will likely be secured through a combination of higher borrowing and budget cuts.

The upshot is that combat operations are putting a strain on the economy. On Sunday, Israel's Central Bureau of Statistics estimated that output grew by 2.5 percent (at an annual rate) in the first half of 2024, down from 4.5 percent in the same period last year.

Before the outbreak of the war, Israel's economy was forecast to grow by 3.5 percent last year. In the end, output expanded by just 2 percent. An even sharper drop was avoided thanks to the country's all-important tech sector, which has been largely unaffected by fighting.

Other parts of the economy have taken a significant hit. In the final quarter of last year and in the weeks after the war began, Israel's gross domestic product (GDP) shrank by 20.7 percent (in annual terms). The slump was driven by a 27 percent drop in private consumption, a drop in exports and a slash in investment by businesses. Household expenditure snapped back at the start of the year, but has since cooled.

Israel also imposed strict controls on the movement of Palestinian workers, forgoing up to 160,000 workers. To tackle those shortages, Israel has been running recruitment drives in India and Sri Lanka with mixed results. But labour markets remain undersupplied, particularly in the construction and agriculture sectors.

According to the business survey company CofaceBDI, roughly 60,000 Israeli companies will close this year due to manpower shortages, logistics disruptions and subdued business sentiment. Investment plans have, in turn, been delayed.

At the same time, tourist arrivals continue to fall short of pre-October levels.

Meanwhile, the war has triggered a steep rise in government spending. According to Elliot Garside, a Middle East analyst at Oxford Economics, there was a 93 percent increase in military expenditure in the last three months of 2023, compared to the same period in 2022.

"In 2024, monthly data suggests military expenditure will be around double the previous year," Garside said. Much of that increase will be used on reservist wages, artillery, and interceptors for Israel's Iron Dome defence system.

Garside told Al Jazeera these expenditures "have mostly been financed by issuance of domestic debt".

Israel has also received some $14.5bn supplemental funding from the United States this year, on top of the $3bn in annual aid that the US provides to the country.

Garside noted, "We are yet to see any major cutbacks to other parts of the budget [like healthcare and education], although it is likely that cuts will be made in the aftermath of the conflict."

Absent a full-scale regional war, Oxford Economics anticipates that Israel's economy will slow to 1.5 percent growth this year. Subdued growth and elevated deficits will put further pressure on Israel's debt profile, which will likely raise borrowing costs and soften investor confidence.

Fitch expects Israel to permanently increase military spending by 1.5 percent of GDP compared to prewar levels, with unavoidable consequences for the public deficit. Last week's rating report noted that "debt [will] remain above 70 percent of GDP in the medium-term".

The report emphasised that public finances have been hit, and that "we project a deficit of 7.8 percent of GDP in 2024 [up from 4.1 percent last year]". Israel's far-right Finance Minister Bezalel Smotrich has publicly disagreed, and expressed confidence that it will fall back to 6.6 percent this year.

"The downgrade following the war and the geopolitical risks it creates is natural," Smotrich said, according to media reports. He added that a responsible budget will soon be passed, and that Israel's ratings would rise "very quickly". For now, doubts remain about the budget's timeline.

There has been speculation that Prime Minister Benjamin Netanyahu is delaying his fiscal package, which may prove domestically unpopular. Failure to pass a budget by March 31, 2025 would automatically trigger snap elections.

Earlier this week, Israel's Central Bank chief – Amir Yaron – called on Netanyahu to speed up the 2025 state budget, as further delays risk stoking financial market instability.

For its part, Fitch believes that Israel will adopt a combination of austerity measures and tax hikes. But in their August 12 report, Fitch analysts Cedric Julien Berry and Jose Mantero pointed out that "political fractiousness, coalition politics, and military imperatives could hinder [fiscal] consolidation".

What's more, the rating agency warned that "the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts".

On Monday, US Secretary of State Antony Blinken said that Netanyahu had accepted a "bridging proposal" designed to reach a ceasefire between Israel and Hamas and diffuse growing tensions with Iran.

The following day, eight Palestinians were killed in an Israeli attack on a crowded market in Deir el-Balah, in central Gaza.

Hamas has yet to agree to the bridging proposal, calling it an attempt by the US to buy time "for Israel to continue its genocide". Instead, the Palestinian group has urged a return to a previous proposal announced by US President Joe Biden, which has more guarantees that a ceasefire would bring about a permanent end to the war.

Netanyahu has insisted that the war will continue until Hamas is totally destroyed, even if a deal is agreed. Israeli officials, including Defence Minister Yoav Gallant, have rubbished the idea of a total victory against Hamas.

A decades-old shadow war between Israel and Iran surfaced in April, when Tehran launched hundreds of drones and missiles at Israel in response to the killing of two commanders from Iran's Islamic Revolutionary Guard Corps (IRGC) in Damascus.

Along its Lebanese border, Israel has traded near-daily attacks with Hezbollah since last October. The armed group began firing on Israel as a show of solidarity with Hamas. Both organisations have close ties with Iran.

More recently, the assassinations of Hamas leader Ismail Haniyeh in Tehran and Hezbollah military commander Fuad Shukr in Beirut have sparked fears that the conflict in Gaza could metastasise into a regional conflict.

"The human toll [of a wider war] could be significant. There would also be huge economic costs," says Omer Moav, an Israeli economics professor at the University of Warwick.

"For Israel, a long war would come with high costs and greater deficits," he said.

In addition to undermining Israel's debt profile, Moav said that prolonged fighting would incur "other costs", like labour shortages and infrastructure damage, as well as the possibility of international sanctions against Israel.

"Israel is currently ignoring the fact that economics may lead to greater [societal] damage than war itself," said Moav. "The government is not behaving responsibly. Does it want to avoid the costs of war, or does continued conflict serve political interests?"

"We continue to expect sterling to strengthen in the coming months on the back of continuing inflation, a recovering real economy and the prospect of a more stable government," says Michael Pfister, FX Analyst at Commerzbank.

The call comes as the Pound to Euro exchange rate recovers losses made earlier in the month, having fallen sharply amidst a downturn in global investor sentiment and an interest rate cut from the Bank of England.

"As concerns about the global economy peaked in late July/early August, sterling came under significant pressure, giving up much of its gains for the year," says Pfister. "This was not surprising, as part of sterling's strength was based on the fact that the UK economy had recently recovered somewhat. Logically, when concerns about the economy arise, some of this strength is lost."

The losses raised questions about whether 2024's top-performing G10 currency had seen its outperformance come to an end. GBP/EUR retreated from highs near 1.19, but analysts think this level can be tested again before the end of the year.

The Bank of England's decision to cut rates by 25 basis points was not fully expected and explains why the Pound lost value on August 01 and 02. Pfister confirms the interest rate cut "certainly did not help the pound in this environment."

Nevertheless, he thinks the Pound can see further upside potential in the coming months. "We continue to believe that sterling should outperform the euro for the time being."

There are three reasons to back the Pound, according to the analyst:

1) Core inflation in the UK remains much more persistent than in other G10 countries.

2) UK growth finally seems to be picking up. This was underpinned by Thursday's release of PMI survey data for August, which showed the UK economy continues to comfortably expand, while forward-looking components of the report confirmed improving confidence amongst the country's businesses.

3) There is still optimism that the new Labour government will undertake much-needed reforms that will also boost the UK's long-term growth potential. "Although there is still a long way to go, fundamental optimism is currently supporting the pound," says Pfister.

Commerzbank forecasts the Pound to end 2024 around 1.19 against the Euro.

Risks to the Pound's outlook include a slowdown in UK economic growth, and the government's poor finances could leave the new government struggling to enact reforms that can boost growth.