Investors will be sitting on pins and needles waiting with bated breath when the Fed meets on September 16th and 17th, where it’s widely expected that Fed Chairman Jerome Powell will give guidance as to where interest rate policy will be headed.
What will the Chairman do?
It’s widely anticipated that the Fed will indeed cut interest rates; of course, the real conversation will be over just how aggressive the Fed is going to get.
Of course, no one knows, but that doesn’t stop investors from speculating.
The economy appears to be in the throes of a weak labor market, which could potentially put pressure on the Fed to take action to ease or soften the impact of an economic slowdown. You can tell that weighs on Chairman Powell's mind, because he mentioned downside labor market risks roughly ten times in his last comments.
When looking at CME's FedWatch Tool , you can see that the probability of a September rate cut has surged from a 50/50 to a near-certain 71.1%.
What’s also interesting is that investors are not expecting the Fed to stop at one interest rate cut; they expect a total of three 0.25% cuts by year-end.
Expect Chairman Powell to move on interest rates for the first time in nine months (which would make it the fourth longest time in history where the Fed did not adjust interest rates).
What helped move the needle toward near certainty of a rate cut was Chairman Powell’s comments at the Jackson Hole Fed Summit. Investors clearly believe the Fed is confirming their dovish tone, and that set small caps soaring. Mr. Powell noted, “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” Of course, a lot can happen between now and the September meeting, as another non-farm payroll report is due, as well as two more monthly CPI releases.
As always, there are a number of pundits chiming in. Allianz’s Chief Economic Advisor, Mohamed El-Erian, believes the Fed “would have cut” rates last week if it had the July jobs report (and those ugly revisions) in hand. He went on to tell Yahoo Finance that while a 0.25% cut is a lock, a larger cut of 0.50% is a real possibility.
Of course, Mr. El-Erian was referring to the downright butt-ugly job revisions that were released a few weeks ago:
What an absolute kick-in-the-teeth surprise to investors, as the May jobs report was revised lower from +144K to +19K.
June’s revision wasn’t much better – revised from +147K to just +14K.
Just like that, 258,000 jobs – Poof Gone!
The Monthly job creation statistic is certainly not the end-all, be-all of economic statistics that the Chairman will use to form his opinion on interest rates, but it will be a factor.
Hang on to your seats, ladies and gentlemen, and grab some popcorn because the interest rate theatre over the next few weeks is going to be very interesting. With all of the political wrangling behind the scenes, you can bet the Fed is feeling the heat to lower rates.
The question will be whether they are still willing to embrace the dove if the next two CPI numbers come in higher than expected.
Your move, Chairman.
Stay the course, my friends.