Wall Street is charging full speed toward a September rate cut. But a couple of economic reports could crash that fantasy into a wall.
Federal Reserve chair Jay Powell gave the greenlight for a possible rate cut. But he also warned that it all hinges on whether jobs and inflation numbers behave.
Powell said the current high borrowing costs are now pushing too hard on the labor market. And that, he claimed, could justify cutting rates as early as mid-September. That was all traders needed to hear. US stocks popped.
Bond yields plunged. Futures traders immediately priced in a 75% chance that the Fed trims its main rate by a quarter point in its next meeting. The current federal funds rate sits between 4.25% and 4.5%, but the market’s already guessing more cuts will follow deep into 2025.
But that bet could die quick. Powell hinted, not promised. And several people inside and around the Fed aren’t convinced. The Fed is stuck between its two legal responsibilities, keeping employment strong and prices stable. Powell admitted it’s not looking good on either side.
July’s jobs report showed hiring slowing way down. That data came in after the Fed’s last meeting. It spooked officials, but the 4.2% unemployment rate helped ease some of the tension. The problem is, if that starts rising, the story changes.
Meanwhile, the inflation side of things is tangled in Trump’s economic moves. His new tariffs on foreign goods have triggered a heated debate inside the Fed. Some believe the price surge will pass. Others think it could stick.
Businesses say the worst impact will hit after they run out of pre-tariff inventory. Consumer prices in July ran at a 2.7% annual rate. Not ideal, but not totally off the rails.
The Fed’s preferred metric, the personal consumption expenditures price index, showed a 2.6% increase in June, above the 2% target. Powell tried to calm that with one line: “We will not allow a one-time increase in the price level to become an ongoing inflation problem.”
That’s the tightrope the Fed is walking. Two reports dropping in September, the August jobs report on the 5th and the CPI on the 11th, will be make-or-break. Michael Gapen at Morgan Stanley said Powell’s tone was soft, but not soft enough to guarantee a cut.
“It does not definitively say the Fed will cut in September, but it comes about as close as it can given the data between now and then,” he said.
While the market debates, the Fed itself is splitting down the middle. Alberto Musalem, who runs the St. Louis Fed and votes this year, said inflation still looks too sticky.
“There is a possibility, not the base case, that there could be some persistence,” he told Reuters after Powell’s speech. Boston Fed president Susan Collins also doesn’t think the decision’s final. She told Bloomberg, “It’s not a done deal in terms of what we do with the next meeting. And we’re going to get more data between now and then.”
Jeff Schmid, who leads the Kansas City Fed, thinks the labor market’s still strong enough. Austan Goolsbee from the Chicago Fed isn’t so sure. He’s worried about lingering inflation, especially in services. All of them vote on rates, and clearly, not everyone’s on the same page.
Inside the Fed board itself, cracks are showing. At the last vote in July, Michelle Bowman and Christopher Waller, both sitting governors and possible successors to Powell, voted for a quarter-point cut. That’s the first time two governors didn’t back the chair on rates since 1993.
All of this is happening while Donald Trump, now back in the White House, is openly attacking the central bank. He’s called Powell a “numbskull” and a “moron” who’s always “too late,” and demanded a massive cut down to just 1%.
Trump’s pick to fill the board seat left by Adriana Kugler, Stephen Miran, is expected to vote for a cut too, if confirmed in time by the Senate.
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