The Waiting Game

Jerome Powell’s remarks at the Jackson Hole meetings last week seemingly foreshadow a coming change to Fed Policy. He said: “My confidence has grown that inflation is on a sustainable path back to 2%.” The market is now pricing a 70% probability of a 25-basis point rate cut and a 30% probability of 50 basis points for the mid-September meeting according to the Chicago Mercantile Exchange.

Our view is that most of this confidence in a rate cut is not so much emanating from a dramatic improvement to the inflation picture. We still need a 50% reduction in the rate of inflation (from 2.9% to 2.0%) to reach the Fed’s target. It seems far more likely to us that it is employment conditions driving the Fed’s change in posture at this juncture. We have already seen job growth weakness in the data and we referenced that data in July as being crucial to any rate cut. That weakness has been substantially extended with the Bureau of Labor Statistics last week cutting prior year job growth estimates by 818,000 through March of this year. Put another way, job growth was incorrectly overstated and the BLS was correcting an error. When spread through the prior year, the average monthly job gain from April 2023 through March 2024 was 173,500 versus nearly 242,000, an analysis of BLS data shows. This may be all the Fed needs to justify its first rate cut in September.

The Fed has consistently said it will be data dependent. And while the market seems highly confident in a cut, we note Powell’s statement is still vague at best. He said: “There is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market” but then added: “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” So we think it’s still too early to say with any degree of certainty that a rate cut is coming. We need to see it in the data. We do think the revised job data may provide the Fed with just enough to justify a rate cut. But we also recognize that any stall in inflation progress could derail current expectations. We will see the August inflation data just before the Fed meets in September. As of now, we’re all dependent on that data to determine what the likely Fed action in September will be.

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