The Federal Reserve, led by Jerome Powell, faces increasing pressure from analysts and politicians regarding potential rate cuts. The Federal Open Market Committee (FOMC) has consistently stated that its decisions are driven solely by economic data and anecdotal evidence. However, this has not deterred prominent figures from voicing their opinions on the matter. Notably, Treasury Secretary Scott Bessent recently appeared on Fox Business's 'Kudlow,' where he suggested that the “fantastic” Consumer Price Index (CPI) numbers might warrant a 50 basis-point rate cut in September.
Bessent's argument hinges on the idea that the Fed should have implemented cuts in June and July had they been more aware of the labor market's true state. Recent data from the Bureau of Labor Statistics revealed a disappointing payroll growth of just 73,000 jobs last month, significantly below the anticipated 100,000. Furthermore, revisions to previous months’ data were drastic, with May's figures adjusted down from 144,000 to 19,000, and June’s from 147,000 to merely 14,000. This brings the average job growth over the last three months down to a mere 35,000, prompting discussions about the need for a larger rate cut to compensate for missed opportunities earlier in the summer.
The push for a more substantial reduction in the base rate is no surprise, especially given Bessent's alignment with the Oval Office's position that Powell and the Fed have been sluggish in normalizing monetary policy. President Trump echoed this sentiment on Truth Social, asserting that tariffs have not contributed to inflation or other economic issues, but rather have led to an influx of cash into the Treasury.
While some analysts remain skeptical about the likelihood of a significant rate cut, many are not dismissing the possibility entirely. Tim Graf from State Street Global suggested that while markets might not fully anticipate a two-click reduction, investors may start to hedge against that possibility as the September meeting approaches. He emphasized that while a cut is not guaranteed, the probability is above zero.
The tone of the FOMC is expected to become more dovish, particularly after two dissenting members expressed their disagreement with the committee's decision to maintain the base rate between 4.25% and 4.5% in July. This dovish sentiment may be further reinforced by the potential appointment of Stephen Miran, a Trump nominee, who is widely perceived as favoring lower rates.
With the FOMC missing a meeting this month to attend the Jackson Hole Symposium, the committee will have additional time to analyze crucial data that could influence their decision. Deutsche Bank's Jim Reid advised investors to remain cautious, suggesting that a September rate cut should not be viewed as a certainty. He noted that the likelihood of a 25 basis-point cut in September has increased, but emphasized the importance of upcoming labor market data in shaping Fed officials' decisions.
Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, expressed a similar outlook, predicting that the Fed is likely to resume rate cuts at the September meeting, totaling 100 basis points. He recommended medium-duration quality bonds for investors seeking income in a declining rate environment.
Despite the overall positive sentiment, markets are seemingly overlooking the uptick in core inflation, which rose to 3.1% in the latest release. This core reading, which excludes volatile components such as food prices, could weigh heavily in the Fed’s considerations, especially as it exceeds the 2% target. Some analysts argue that this data may even lower the probability of a rate cut in September. Elyse Ausenbaugh, head of investment strategy at JPMorgan Wealth Management, indicated that while the Fed might consider a move next month, she doesn't believe a cut is as likely as the market suggests.
Market strategist Larry Tentarelli cautioned against expecting a rate cut in September, highlighting that the disappointing July payroll report and a slight increase in the unemployment rate signal a potentially weakening labor market. He noted that consecutive months of rising 12-month CPI readings complicate the Fed’s justification for a rate cut at the upcoming meeting. While he remains bullish on the S&P 500 index for the year-end, he advises caution regarding the likelihood of a September rate cut unless there are significant declines in the job market over the next 45 days.
