Last week’s deluge of data left behind some distinct impressions: inflation is on the run, the labor market appears to be fine if no longer on fire, and the economy is not headed for the cliff despite the ever-increasing potential for a significant slowdown. This is the backdrop for an intensely critical period for Federal Reserve policymakers. It begins next week with the central bank’s annual meeting in Jackson Hole, Wyoming, continues through the first week of September with an ostensibly jobs report, and then wraps up with more vital economic data culminating in the Fed’s Sept. 17 -18 policy meeting. First: Chairman Jerome Powell’s policy speech next Friday to wrap up the Jackson Hole event, in which he is expected to at least outline — in pencil, not pen — the likely path ahead, with enough flexibility that the Fed not to succeed. they were fooled again, as they were in the early days of the inflation boom. “He still wants to give himself some room. We have to remember that the Fed made a mistake, the transitory” call on inflation, said Quincy Krosby, chief global strategist at LPL Financial. “That mistake is in the history books. They were slow to do what they were supposed to do. They don’t want to err on that side of the equation.” In particular, the Fed is faced with how quickly and aggressively to react now that the rate of inflation is falling. Here’s what we learned from the latest quick round of data: Consumer price increases have slowed to their weakest pace in more than three years, wholesale prices just rose in July, spending proved much more resilient than expected and layoffs, after a brief rise a few weeks ago, they are close to their long-term trend. To be sure, it wasn’t all good news: Housing remains a weak spot for the economy and appears to be getting worse, as judged by construction starts and permits hitting a four-year low in July. Wages are rising, but just 0.7% faster than inflation. And if you’re looking for inflation, it showed up in imports, where the annual rate of price increases hit the highest level since December 2022, albeit at just 1.6%. Poised for easing However, in largely balanced markets the Fed can – and should – start cutting interest rates next month. “This is not an exact science. It’s probably as much an art form as a science,” Krosby said. “The longer they wait, the more problems they will have. There will be different problems, but they will have problems.” Market prices on Friday afternoon showed about 3-to-1 odds of a quarter-point decline, or 25 basis points, in September, according to CME Group’s FedWatch index of Fed Funds futures. Beyond that, traders see another similar move in November and December, with the final cut this year likely to be half a unit. The biggest concern now is that the Fed is backing off because it wants to guide the economy toward its famous soft landing, rather than having to move dramatically because it has to, ie if a crater in the labor market or some other crisis appears. “The market wants to be commensurate with inflation coming down, not an extraordinary rate cut,” Crosby said. “The primary fear for the market is that we have a recession, and not a shallow recession but a deep recession that completely changes the equation.” Former Fed Vice Chairman Richard Clarinda, a self-described “temporary charter team member” while serving, said he thinks the most likely path now is a quarter cut in September. However, he also predicted that the August non-farm payrolls report, due in early September, would have a huge impact, despite Powell stressing that the Fed is “data dependent” and not “point dependent”. data”. “Jay Powell is saying they don’t want to depend on the data points, and I think that makes sense. But I will emphasize that I think there is particular significance to what we’re hearing about the labor market,” Clarinda said during a CNBC interview. interview Friday. “If it’s a disastrous report, negative wages and big employment growth, then we’ll go to 50. So I think it depends on the data for that first move.” The case not to cut Of course, not all market participants agree with a reduction. Even with a growing emphasis on the jobs picture, Powell and other Fed officials are still unlikely to declare a complete victory on inflation, and with good reason, said Komal Sri-Kumar, head of Sri-Kumar Global Strategies. While headline inflation numbers are moving lower, housing-related costs continue to defy expectations to fall, and a strong 1% increase in retail spending in July suggests consumers are putting up with high interest rates, itself an inflationary trend. “You [cut] because inflation is below target… The second reason you have to cut is because the economy is weak,” Sri-Kumar said. “Where is the weakness? I don’t think you have any signs of weakness in the economy. You have no signs of inflation getting under control and no sign of the Fed changing focus. Jackson Hole is on the way It doesn’t have to wait until September 18th. He’s already started, and he can give him another boost when he speaks at Jackson Hole.”
