The deluge of data from the past week has left some stark impressions: Inflation is happening, the labor market seems fine if no longer hot, and while the possibility of a sharp slowdown is always possible, the economy is not on a cliff. This is the backdrop for an obviously critical period ahead for Fed policymakers. The meeting begins next week with the Fed’s annual secret meeting in Jackson Hole, Wyoming, continues with the seemingly make-or-break jobs report in the first week of September, and then ends with the Fed’s more important economic report on September 17. Data ends. First up: Fed Chairman Powell will give a policy speech next Friday to wrap up the Jackson Hole affair, and he’s expected to at least outline a likely future course with a pencil rather than a pen, and be flexible enough to avoid bogging down the Fed. . “He still wants to give himself a little bit of room,” said Quincy Krosby, chief global strategist at LPL Financial. “We have to remember that the Fed made the mistake of making a short-term call on inflation.” “This mistake has gone down in history. They were late on what they should have done. They didn’t want to make a mistake on that side of the equation.” Specifically, the Fed faces the question of how fast and how much it should take if inflation falls. Active response measures. Here’s what we know from the last round of snap data: Consumer price rises have slowed to their lowest levels in more than three years, wholesale prices barely rose in July, spending is proving more resilient than expected, and Layoffs are approaching their long-term trend after a brief spike a few weeks ago. To be sure, not all the news is good: Housing remains a weak link in the economy, and things appear to be getting worse, judging by construction starts and permits hitting four-year lows in July. Wages are growing, but only 0.7% faster than inflation. If you are looking for inflation, it will show up in imports, with the annual increase in import prices reaching the highest level since December 2022, albeit only at 1.6%. Ready to Relax Overall, though, the market largely believes the Fed can and should start cutting interest rates next month. “It’s not an exact science. It’s probably as much an art form as it is a science,” Crosby said. “The longer they wait, the more problems they’re going to have. There’s going to be different problems, but they’re all going to have problems.” Market pricing Friday afternoon, according to CME Group’s FedWatch measure of federal funds futures contracts The odds of a 25 percentage point or 25 basis point decline in September are about 3 to 1. Since then, traders have expected similar moves in November and December, with the final decline this year possibly being half a percentage point. The biggest concern now is that the Fed is cutting rates because it wants to guide the economy toward a so-called soft landing, rather than because it is forced to take drastic action if the labor market struggles or another crisis emerges. “The market wants a rate cut commensurate with falling inflation, not an emergency rate cut,” Crosby said. “The market’s biggest concern is that we’re going to go into a recession, and not a shallow recession, but a deep recession that completely changes the status quo.” Pre-meeting Vice Chairman Richard Clarida, who described himself as a “charter member of the interim team” during his tenure, said he believed the most likely path now was a 25 percentage point rate cut in September. However, he also predicted that the August non-farm payrolls report, which will be released in early September, will have a huge impact, although Powell emphasized that the Fed is “data dependent” rather than “data point dependent.” “Jay Powell said they don’t want to rely on data points, and I think that makes sense,” Clarida told CNBC. “But I would emphasize that I do think what we’re hearing about the labor market is particularly Important. “If this is a catastrophic report, negative employment and huge job growth, we’ll get to 50. So I do think the first step depends on the data. “The argument for not cutting rates is that, to be sure, not all market participants agree with a rate cut. Even with the increasing focus on the employment situation, it is still unlikely that Powell and other Fed officials will do so,” said Komal Sri-Kumar, global head of strategy at Sri-Kumar. The victory over inflation has been declared, and for good reason. While headline inflation numbers are moving lower, housing-related costs continue to fall unexpectedly, and retail spending rose a solid 1% in July, suggesting consumers are enduring higher interest rates. , which is an inflationary trend in itself. “You (cut rates) because inflation is below target…The second reason you should cut rates is because the economy is weak,” Sri-Kumar said. “Where are the weaknesses? I see no signs of weakness in the economy. There are no signs that inflation is under control, and there are no signals for the Fed to shift focus.” However, Sri Kumar said he expected the Fed to cut interest rates anyway, Powell will send a strong signal in Jackson Hole that easing policy is on the way. “He’s probably going to not only give his instructions, but he’s going to be gloating about his success in getting inflation down significantly,” he said. “So the market rally doesn’t have to wait until September 18th. It’s already started and he’s on it It could be another stimulus package when Jackson Hole speaks.”
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