Last week’s deluge of data left some mixed impressions: Inflation is running, the labor market appears OK if not on fire, and the economy is not headed off a cliff despite the ever-present possibility of a significant recession. . This is the backdrop to a remarkably important period for Federal Reserve policymakers. It begins the week before with the Fed’s annual meeting in Jackson Hole, Wyoming, continues with the report on jobs in the first week of September, and then the Fed’s Sept. -18 policy meeting. First: President Jerome Powell’s policy speech next Friday to wrap up the Jackson Hole event, where he’s expected to at least sketch — in pencil — the likely course. Fooled again, as it did in the early days of inflation. „He still wants to give himself some room. We have to remember, the Fed made a mistake, a temporary one,” said Quincy Krosby, chief global strategist at LPL Financial, on the call for inflation. „That mistake is in the history books. They’re too late to do what they should have done. They don’t want to make a mistake on this side of the equation.” In particular, the central bank is faced with how quickly and aggressively to respond to falling inflation rates. Here’s what we learned from the latest flash data: Consumer price inflation slowed to its weakest pace in more than three years, wholesale prices barely rose in July, spending was more resilient than expected and layoffs, after a brief spike a few weeks ago, are near their long-term trend. To be sure, all the news isn’t good: Housing remains a weak spot for the economy and is getting worse, as judged by construction starts and permits hitting a four-year low in July. Wages are rising, but 0.7% faster than inflation. If you’re looking for inflation, it showed in imports, where the annual pace of price increases reached its highest level since December 2022, albeit at just 1.6%. Still poised to ease, markets are largely balanced as the central bank could — and should — begin cutting interest rates next month. „It’s not an exact science. It’s as much an art form as a science,” Crosby said. „The longer they wait, the more problems they will have. Different problems, but they will have problems.” According to CME Group’s FedWatch gauge of fund futures contracts, market prices on Friday afternoon traded at 3-to-1 odds, or 25 basis-points, of a quarter-percentage-point drop in September. From there, traders see another similar move in November and December, with the year-end cut likely to be half a point. The biggest concern right now is that the Fed wants to steer the economy into a soft landing rather than being forced into a recession, meaning a labor market crater or some other crisis. „The market wants inflation to be consistent with a slowdown, not an emergency 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.” Richard Clarida, a former Fed vice president who during his tenure was a self-described „charter member of group moderation,” said in September that he thought a quarter-point cut was the most likely path now. However, he also predicted that the August nonfarm payrolls report, due in early September, would have a bigger impact, though Powell insisted the Fed was „data driven” and not „data point driven.” „Jay Powell says they don’t want to depend on data points, and I think that makes sense. But I think there’s a special emphasis on what we’re asking about the labor market,” Clarida said during CNBC. The interview is on Friday. „If it’s a doomsday report, negative wages and a big increase in employment, we’ll get to 50. So I think it’s data-driven for that first step.” Not all market participants are on board with the cut to be sure not to cut. While the jobs picture is heavily weighted, Powell and other central bank officials are unlikely to declare a total win on inflation just yet, and with good reason, said Komal Sri-Kumar, head of Sri-Kumar Global Strategies. While headline inflation numbers have moved lower, housing-related spending has continued to beat expectations for a slowdown, and a strong 1% gain in retail spending in July suggests consumers are bracing for higher interest rates, which are inflationary trends. “You [cut] Because inflation is below target … the second reason you need to cut is because the economy is weak,” Sri Kumar said. „Where is the weakness? I don’t think you have signs of weakness in the economy. You don’t have any signs that inflation is coming under control, and you don’t have any signal that the Fed is changing its focus.” However, Sri-Kumar said he expects the Fed to taper anyway and that Powell will give a strong signal. Jackson Hole said that easy policy „is going to give his signal, But he’s going to pat himself on the back for the success of getting inflation down significantly,” he said. „It doesn’t have to wait until September 18. It’s already started, and he could give it another boost when he speaks in Jackson Hole.”
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