In A Nutshell: Rates could wobble quite a bit over the next two weeks leading up to the September 16th Fed meeting as Chair Warsh’s Jackson Hole speech last Friday put a hike back on the table, but ultimately the decision will come down to incoming economic data.
Upcoming Attractions
This week brings the August jobs report on Friday along with the August JOLTS report on job openings, layoffs, and quits on Wednesday. After July’s surprising loss of 23,000 jobs, August is expected to show a rebound to about 55,000 jobs created. The unemployment rate is expected to remain low at 4.1%. The most important metric from the JOLTS report is job openings, which is expected to fall ever so slightly from July based on real time Indeed data. While the labor market data will be carefully scrutinized, it’s unlikely to be decisive for the Fed’s rate decision because the committee is currently more concerned about inflation.
This is also the last week before the Fed’s blackout period for their September 16th meeting. With the decision coming down the wire, speeches from Governors Barr (Monday), Barr, and Hammack (both Thursday) will be closely watched for clues as to how the eleven voting members of the FOMC other than Chair Warsh are thinking. Hammock had dissented in the last meeting in favor of a hike and has spoken openly about the need for more restrictive policy.
Last Week’s Highlights
Fed Chair Warsh’s Jackson Hole speech provided much more clarity than expected on his views of the economy and Fed policy. He explicitly cautioned against calling it “forward guidance,” but it certainly changed expectations around the next Fed meeting. Previously, the soft economic data of the last couple of months had lulled markets into thinking the Fed would continue to hold, but Warsh came out with a hawkish “tough on inflation” message explicitly stating that even taking into account markets like housing, he does not believe that policy is currently restrictive. Meaning, the default has changed. Instead of needing bad economic data over the next two weeks to result in a Fed hike, now we most likely need good data to not hike. That doesn’t mean a hike is guaranteed (futures markets currently have it at about a two thirds chance) because there are plenty of reasons to think the jobs data this week and the CPI inflation data next week will bail them out. On inflation in particular, between residual seasonality (basically statistical noise) and a fading tariff effect, next week’s report could let them kick the decision to the next meeting.
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