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The deluge of data last week left a few distinct impressions: Inflation is rising, the labor market seems fine but not hot, and the economy is not headed for a cliff despite the continued potential for a major slowdown. That’s the backdrop for a remarkably critical period ahead for Fed policymakers. It starts next week with the central bank’s annual conference in Jackson Hole, Wyoming, continues in the first week of September with what appears to be a crucial jobs report, then moves through more vital economic data and concludes with the Fed’s policy meeting on Sept. 17 and 18. First up: Fed Chairman Jerome Powell’s policy speech next Friday to wrap up the Jackson Hole event, during which he is expected to at least sketch out — in pencil, not pen — the likely path forward, with plenty of flexibility so that the Fed doesn’t get fooled again, as it did in the early days of rising inflation. “He still wants to give himself a little bit of room. You have to remember that the Fed made one mistake, which was the fleeting call for inflation,” said Quincy Krosby, chief global strategist at LPL Financial. “That mistake is in the history books. They were late in what they were supposed to do. They don’t want to make a mistake on that side of the equation.” Specifically, the Fed is faced with how quickly and aggressively it should respond now that inflation is starting to ease. Here’s what we learned from the latest rapid round of data: Consumer price increases slowed to their weakest pace in more than three years, wholesale prices barely rose in July, spending proved more resilient than expected, and layoffs, after a brief uptick a few weeks ago, are nearing their long-term trend. To be sure, the news hasn’t all been good: Housing remains a weak spot for the economy and appears to be getting worse, as judged by construction starts and permits, which hit a four-year low in July. Wages are rising, but only 0.7% faster than inflation. And if you’re looking for inflation, it showed up in imports, where the annual rate of price increases hit its highest since December 2022, albeit at just 1.6%. Ready for Easing Still, markets generally feel the Fed can — and should — start cutting rates next month. “It’s not an exact science. It’s probably as much an art form as it is a science,” Krosby said. “The longer they wait, the more problems they’re going to have. There will be different problems, but they’re going to have problems.” Markets on Friday afternoon were pricing in about 3-to-1 odds of a quarter-point, or 25 basis point, cut in September, according to the CME Group’s FedWatch gauge of Fed funds futures. From there, traders see another similar move in November and December, with the final cut this year likely to be a half-point. The biggest worry now is that the Fed will cut rates because it wants to steer the economy toward a so-called soft landing, rather than having to move dramatically because it has to, in the event of a labor market collapse or some other crisis. “The market wants it to be consistent with lower inflation, not an emergency rate cut,” Krosby said. “The fundamental fear of the market is that we have a recession, not a shallow recession but a deep recession that completely changes the equation.” Former Fed Vice Chair Richard Clarida, who described himself as a “founding member of the interim team” during his tenure, said he thinks the most likely path now is a quarter-point cut in September. However, he also expected the August nonfarm payrolls report, due in early September, to have a major impact, despite Powell’s assertion that the Fed is “data-driven” and not “data-point-driven.” “Jay Powell says they don’t want to be data-driven, and I think that makes sense. But I do stress that I think there’s a particular importance to what we hear about the labor market,” Clarida said during an interview with CNBC on Friday. “If it’s a catastrophic report, negative payrolls and a big jump in employment, we’re going to 50. So I think he’s data-driven for that first step.” The No-Tie Argument Not all market participants are on board with the easing. Even with the increased focus on the jobs picture, Powell and other Fed officials are still unlikely to declare total victory over inflation, and for good reason, said Komal Sri Kumar, president of Sri Kumar Global Strategies. While headline inflation numbers are moving lower, housing costs continue to defy expectations that they will head lower, and a strong 1% gain in retail spending in July suggests that consumers are embracing higher interest rates, which is itself an inflationary trend. “You [cut] “The second reason you’re cutting rates is the weakness in the economy,” Sri Kumar said. “Where is the weakness? I don’t think you have signs of weakness in the economy. You have no signs of inflation being brought under control, and you have no sign that the Fed is going to change its focus.” Still, Sri Kumar said he expects the Fed to cut rates anyway, and Powell to give a strong signal at Jackson Hole that easier policy is on the way. “He’s probably going to basically give his signal, not just on that, but also congratulate himself on getting inflation down significantly,” he said. “So the big rally in the market doesn’t have to wait until Sept. 18. It’s already started, and he might give him another piece of stimulus when he speaks at Jackson Hole.”
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