The bottom line? September Fed cut locked in, but with less clarity about what follows
- Today’s data releases may complicate the calculus for the Fed without changing next week’s policy decision. A hotter-than-expected report on consumer inflation, coupled with an unexpected surge in jobless claims, increases the tension between the Fed’s two primary mandates and how its primary policy lever should be used to address them.
- For now, policymakers appear to be more concerned about the near-term impact of not easing, signaling that the risk to the labor economy, and overall economic momentum, presents the greater near-term risk.
- It’s that perception that’s expected to drive the Fed to trim its policy rate next week. The bigger question is “what’s next?” Jay Powell’s press conference and the release of updated FOMC projections should go a long way in providing an answer.
By the numbers: Hotter than expected
- The consumer price index rose 0.4% in August, fractionally above the consensus forecast for a 0.3% increase. The August increase was enough to lift the 12-month index to 2.9%, its highest point since January.
- The recent surge erases the downtrend in consumer prices, which had bottomed around 2.3% in April.
- Core CPI, which excludes more volatile food and energy costs, rose 0.3%, falling in line with forecasts. In tandem with headline CPI, core inflation has also reaccelerated in recent months, rising to 3.1% on a 12-month basis.
- While both core and headline inflation measures moved higher, much of the increase appears to be tied back to tariffs on imported goods, either directly or indirectly. Even so, housing costs continue to rise at a pace that’s challenging for renters and potential buyers. Tariffs certainly don’t help, nor does the sharp slowdown in immigration against already challenging hiring conditions in a sector in which 25% or more of workers are foreign-born. The combination continues to put upward pressure on construction costs. Even so, the long-term trend in housing inflation is more reflective of an extended period of underinvestment in housing and a surge in mortgage interest rates than other more recent developments.
Broad thoughts: Resurgent inflation not enough to deter Fed cut
- The upcoming September FOMC meeting has been circled on the calendar as the likely turning point for Fed policy, with a cut widely anticipated. Fed policymakers have done nothing to push back against those expectations despite lingering questions about the near-term path for inflation and the fact that it remains above the central bank’s target.
- If anything, Fed Chair Jay Powell set the table for a rate cut in his Jackson Hole speech last month, acknowledging the growing risk to the Fed’s full employment mandate and the need for policymakers to address that risk.
- Powell’s Jackson Hole speech came before the surprisingly weak August jobs report and recent revisions to data spanning back to March 2024 that cast the pace of job creation since that time in a more negative light.
- To this point, labor market weakness had been most apparent in weaker hiring and a notable decline in job openings over the past few years. Today’s unexpectedly high jobless claims print, which came in at 263,000 for the week ended September 6, will raise additional questions and sharpen the focus on the near-term trend, although it may have also been skewed to some degree by the typical noise around various holidays, including Labor Day. Additional data in the coming weeks should provide perspective on that point.
- Even so, claims have been edging higher since July. Coming off four consecutive months of lackluster nonfarm payrolls, it’s unlikely that job creation can remain so tepid indefinitely. A stretch of slower job creation doesn’t necessarily lead to rising layoffs, but the longer the period of weakness extends, the greater that risk becomes.
- Any indication that employers are moving to more aggressively trim payrolls would raise further questions about the near-term outlook for the economy and the need for the Fed to act decisively to deliver additional rate cuts.
- Recently, the focus has turned to the potential for the Fed to surprise the markets with a half-point cut this month rather than an incremental quarter-point move. Leading up next week’s FOMC meeting, investors will be sifting for clues from policymakers about the size of that expected cut. For now, markets are still coalescing around a more measured quarter-point rate cut as the most likely outcome.
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