Further Policy Adjustments Expected, But Not This Month

Ahead of the Fed’s blackout period next week, several Fed members took to various forums this week to offer an updated assessment of the data and expectations for policy.?

?

Earlier this week, we heard from Fed Governor Christopher Waller, Boston Fed President Susan Collins and Cleveland Fed President Loretta Mester all urging patience as the Fed further assesses the state of the U.S. economy and incoming data.?

?

Yesterday, New York Fed President John Williams chimed in as well, suggesting policy may be at an appropriate level for now but questioned whether it was “sufficiently restrictive.” The question now, he asked during comments speaking to Bloomberg, is “do we need to maybe raise rates again to make sure that we’re keeping that steady progress in terms of shrinking imbalances in the labor market and bring inflation back down?”

?

Like Mester, Dallas Fed President Lorie Logan offered support for a potential pause in September depending on the incoming data between now and the September 20th announcement, but warned that a temporary pause would likely be just that, temporary. Speaking to the Dallas Business Club, Logan was clear “skipping does not imply stopping.”

?

Newly-appointed Chicago Fed President Austan Goolsbee was also among those suggesting policy may be near or even at the terminal level, suggesting the conversation should soon adjust from how high to how long? Speaking to Marketplace radio, Goolsbee said, “We are very rapidly approaching the time when our argument is not going to be about how high should the rates go; it's going to be an argument about how long do we need to keep the rates at this position.”

?

And finally, speaking at an event in Florida, Atlanta Fed President Raphael Bostic was seemingly the most dovish in nature, voicing optimism?policy was at a sufficiently restrictive level, but warned the lagged effect will take time to show the full impact on the economy. “What I’m grateful to say is we’ve seen inflation come down. I feel like we’re in a restrictive space now. And now we just need to let that restriction play out,” Bostic said.?

?

While the Fed debates its next move, it’s clear the general tone of the Committee has shifted somewhat from Chair Powell’s more hawkish sentiment at Jackson Hole to one of patience. That being said, Fed officials remain data dependent and as Boston Fed President Lorie Logan noted, with another round of consumer and producer prices data released next week,?it “could confirm that we need to do more to extinguish inflation.” But again even with an uptick in price pressures, the Committee seems comfortable waiting until November to take further action despite the need to ensure ongoing progress amid the substantial upside risk to prices.?

?

Speaking of Fed members, on Wednesday, the Senate voted to confirm Philip Jefferson as Federal Reserve Vice Chair in a 88-10 vote. Additionally, Lisa Cook, who was confirmed by the Senate in May 2022, was also confirmed Wednesday in a 51-47 vote for a full term. Jefferson’s term began in 2022 and will conclude in 2036 while his four-year term as Vice Chair will expire in 2027 with reconfirmation an option. Cook was confirmed for a full 14-year term ending 2038.?

And finally, a confirmation vote was held for Adriana Kuglar to fill the last vacant seat on the Board left by the departure of Lael Brainard who headed to the National Economic Council.?Kukgar currently serves as the U.S. executive director at the World Bank Group.

?

On the data front, yesterday, initial jobless claims unexpectedly fell 12k from 228k to 216k in the week ending September 2, the lowest level since February. According to the median forecast, jobless claims were expected to rise to 234k. Continuing claims, meanwhile, dropped from 1.72M to 1.68M in the week ending August 26, the lowest level since July.

?

In addition, yesterday, nonfarm productivity was revised lower from 3.7% to 3.5%, while unit labor costs were revised higher from 1.6% to 2.2% in the final Q2 report.

?

This morning, wholesale inventories declined 0.2% in the final July print following a 0.7% drop in June and the fifth consecutive month of contraction.

?

Later today, consumer credit is expected to increase by $16.0b in July following a $17.8b gain the month prior, and wholesale inventories are expected to decline 0.1% in the final July report.

?

Next week the economic calendar has a few key reports beginning on Wednesday with the latest look at the August CPI and the PPI on Thursday.

?

The latest read on inflation showed a slightly higher rate of inflation at least on the headline while the core continued to retreat, albeit minimally. As the Fed debates its next policy move, any further uptick in prices is going to complicate the Committee’s current lean to pause in September. This month, consumer headline inflation is expected to rise 0.5% and 3.6% year-over-year, with producer prices up 0.4% and 1.4% over the past 12 months.

?

Excluding food and energy the core CPI is expected to rise 0.2% and 4.3% over the past 12 months and the core PPI is also expected to rise 0.2% in August and 2.2% year-over-year.

?

Also on Thursday, the August retail sales report will be released. The storyline for the consumer remains unchanged. The consumer continues to spend, but has increasingly shifted purchases towards services consumption. With savings greatly reduced, student loan payments set to return in October, credit card balances rapidly rising, households are becoming increasingly choosy, and will expectedly become more choosy going forward further undermining momentum in sales.?

?

The week is wrapped up with a look at the September Empire Manufacturing Index, industrial production and capacity utilization, well as consumer confidence.

?

As borrowing costs continue to rise and inflation remains elevated eroding purchasing power, while the notion of a avoiding a soft landing has provided welcome support to optimism for many it is not enough to entirely offset the mounting pressure on the average household. In the latest report, the consumer sentiment Index fell to 69.5 in August reading, a two-month low. In the details of the report, a gauge of current conditions declined to 75.7 and a gauge of future conditions fell to 65.5 in August print,

?

Next week, sentiment is expected to tick down further to a reading of 69.4 in September.

?

Finally, with the FOMC set to meet in just nine days’ time, the committee does enter its usual blackout period leaving investors to further parse earlier comments from officials urging the need for patience as the terminal fed funds rate is arguably within reach.

?

-Lindsey Piegza, Ph.D., Chief Economist