Aside from today’s meeting between Trump and Zelensky, one of the key events this week is the annual Jackson Hole Economic Policy Symposium, scheduled for August 21-23. The highlight for investors all around the world will be Fed chief Jerome Powell’s speech on Friday.
The latter will likely address, if not Donald Trump’s continued attacks, at least the state of inflation and the outlook for U.S. monetary policy. According to CME’s FedWatch tool, markets are currently pricing in around 82% for the possibility of a 25 bp rate cut at the September meeting.
As for why the move is not expected to be larger, the answer lies in the Fed’s dual mandate: maintain price stability and support maximum employment. At the moment, both areas are sending mixed signals, which complicates the Fed’s decision and offers little comfort to the S&P 500.
On the one hand, job creation has slowed sharply: nonfarm payrolls grew by only 73,000 in July, with significant downward revisions for May and June, which totaled 258,000. This put the three-month average at only 35,000, indicating a sharp slowdown in employment, an argument in favor of a rate cut.
On the other hand, inflationary pressures are re-emerging. While CPI rose by only 0.2% m-o-m in July (vs. 0.3% in June), producer prices (PPI) were much higher than expected: 3.3% y-o-y vs. 2.5% expected, and 0.9% m-o-m vs. 0.2% expected. Core PPI also surprised to the upside, at 3.7% y-o-y and 0.9% m-o-m.
As the recent Beige Book pointed out, tariffs are increasingly filtering into prices. This does not mean that the Fed will refrain entirely from cutting rates in September, but it is likely to rule out a larger move — say, 50 basis points — making a smaller step, such as 25 basis points, more likely.
This content is for informational purposes only and does not constitute financial, investment, or other professional advice. It should not be considered a recommendation to buy or sell any securities or financial instruments. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.
Leave a Reply