Markets were hoping for a further signal of their estimations this week, at the Jackson Hole Symposium held by the Federal Reserve Bank of Kansas City. Jackson Hole has previously been the site of tidal changes in monetary policy, with spectators widely expecting Chairman Jerome Powell to keep up the tradition at the end of the week.
But as the summit draws closer, the data is only shifting further away from a rate-cut scenario, and the likelihood of a lower cut is more tenuous.
A week ago, the chance of a September cut was being priced in at more than 95% by the market. At the start of a week that might otherwise have firmed that belief, the odds are lower. According to CME’s FedWatch, the chance of the base rate being lower by one click to between 4% and 4.25% now stands at a little under 85%, with a 15.2% chance of a hold.
Markets are flat this morning as the events of late last week (namely, President Trump’s meeting with Russia’s President Vladimir Putin) didn’t do enough to shift the dial on prospects for better or worse. Before the bell, the S&P 500 is down 0.3%, the Nasdaq down 0.4% and the Dow up a minor 0.08%. S&P futures are down 0.08%.
In Europe the FTSE 100 is flat, Germany’s DAX down 0.3% and the CAC down 0.6%. In Asia the Nikkei 225 is up 0.77%, the SSE up 0.85% and the Hang Song Index down 0.37%.
Markets have good precedent to be looking toward the end of the week (the symposium is held from Thursday to Sunday) for the major economic headlines. As Deutsche Bank noted to clients this morning: “The Fed Chair’s speech at Jackson Hole has often been used to send important policy signals, and it was last year that Powell said the “time has come for policy to adjust” before they then cut rates at the next meeting for the first time since the pandemic. This time around, we don’t have the full agenda yet, but the subtitle for Powell’s speech on the Fed’s website says “Economic Outlook and Framework Review”, so we can expect some insight on those topics.”
The notice of framework review is particularly of interest Henry Allen, a macro strategist at Deutsche, added in his note. The last time such a framework concluded was in 2020 and resulted in a shift toward average inflation targeting. Essentially, the Fed would look at periods where inflation had been persistently lower than 2% (across the span of the 2010s, for example) and would allow for policy which supported inflation above the 2% target to counteract the timing overall.
“The Fed also reinterpreted their approach to full employment, in that a tight labour market alone wasn’t a reason to raise rates. So that implied a move away from the pre-emptive approach whereby the Fed would tighten policy to get ahead of future inflation as the labour market tightened,” Allen wrote. “Of course, we now know that shortly after the framework review, there was then a major burst of inflation, and although it had many drivers, our U.S. economists concluded in a Friday note that the new framework was a contributor to that overshoot.
“So this time around, they expect Powell’s speech to call for rolling back the 2020 modifications and restoring a primary role for pre-emption.”
If the Fed does decide to take a longer-term view on inflation, those hoping for a cut may be disappointed. Since 2021, inflation has stayed persistently above the target of 2%, with analysts suggesting further pressures are coming down the pike courtesy of President Trump’s tariff plan.
A clear shift
Not even a week ago, the likes of Treasury Secretary Scott Bessent were not only confident of a September cut but also questioned whether a larger cut could be justified. The pressure for a cut came from a shock jobs report from the Bureau of Labor Statistics, which revealed the employment market has been in far worse shape this summer than previously expected.
The market’s surety of a cut grew as a result, expecting the Federal Open Market Committee (FOMC) to rush to the aid of the maximum employment side of its dual mandate. A better-than-expected consumer inflation report added to confidences—though most conveniently overlooked the fact core inflation has now inched over 3%.
However, July’s Producer Price Index (PPI) poured a little cold water on the excitement, showing the fastest increase since March 2022 and hinting that while tariff pass-through hasn’t yet fully hit consumers, it’s bleeding into the domestic economy.
Indeed, the data has been enough to push Bank of America to side with the minority: That Powell will announce no change to the base rate next month.
Global economists Claudio Irigoyen and Antonio Gabriel wrote Friday: “With inflation essentially stuck over the past year, the tariff passthrough that we still expect, and the labor supply story keeping the unemployment rate historically low, we still think there is a strong case for the Fed to remain on hold. We will see next week if Powell holds the line or not, and then focus will shift to the next jobs report.”
Here’s a snapshot of the action prior to the opening bell in New York:
- S&P 500 futures were flat Monday morning.
- STOXX Europe 600 was down 0.1% early trading.
- The U.K.’s FTSE 100 was down 0.1% early trading.
- Japan’s Nikkei 225 was up 0.77%.
- China’s CSI 300 was up 0.88%.
- India’s Nifty 50 was up 1%.
- Bitcoin declined to $115.180K.
