Markets brace for likely September rate cut as the Fed chair recasts economic risks…
- The Federal Reserve’s annual Jackson Hole summit concluded with a notable shift in tone from Chair Powell and his colleagues. Powell emphasized that “the balance of risks appears to be shifting,” suggesting that concerns are no longer concentrated solely on inflation. Instead, policymakers are increasingly attentive to the risk of labor market deterioration, warning that such weakness can emerge quickly in the form of higher layoffs and rising unemployment. This marks an important change in the Fed’s policy narrative, signaling that employment stability is becoming as crucial to the central bank’s deliberations as is inflation.
- The labor market has indeed softened in recent months. July’s employment report showed below-trend job creation, and downward revisions to the May and June data effectively erasing much of the earlier strength, leaving net hiring flat over the summer. Economists have characterized this dynamic as a “No Hire, No Fire” economy – where job creation stalls but employers, facing tight labor conditions in prior years, continue to hoard talent aggressively. This stagnation, however, may be an early warning sign that economic momentum is fading more broadly.
- Against this backdrop, two Fed governors at the most recent FOMC policy meeting argued for a rate cut. The latest labor data has provided Chair Powell and other cautious members with the justification to consider such an action more seriously. Markets responded swiftly to Powell’s comments with investors now treating a September rate cut as all but guaranteed. Equity indices advanced on the expectation of easier monetary policy while Treasury yields moved lower in anticipation of a lower rate environment.
- Looking ahead, the July reading of the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, will be released later this week. Consensus expectations call for headline inflation at an annual rate of 2.6% with a 0.2% month-over-month increase, and slightly below last month’s pace. Core inflation is projected to be 2.9% year-over-year with a 0.3% monthly increase.