![How this week's big economic news will influence the Fed's decision](https://news7g.com/wp-content/uploads/2024/08/108014585-17224590832024-07-31t204917z_998265604_rc2i69a6g2co_rtrmadp_0_usa-economy-fed-780x470.jpeg)
The deluge of data this past week has left some distinct impressions: Inflation is falling, the labor market looks healthy if not booming, and the economy is not in a tailspin although there is still significant risk of a recession. That sets the stage for a clearly important period ahead for Federal Reserve policymakers. It starts next week with the central bank’s annual meeting in Jackson Hole, Wyoming, continues into the first week of September with what looks like a make-or-break jobs report, then moves on to more important economic data, ending with the Fed’s policy meeting on September 17-18. First up: Chairman Jerome Powell’s policy speech next Friday to close out Jackson Hole, where he is expected to at least sketch out — in pencil, not pen — a likely path forward, with plenty of flexibility so the Fed doesn’t get fooled again, as it did in the early days of the inflation surge. “He still wants to give himself some space. We have to remember that the Fed made a mistake, which was calling for temporary inflation,” said Quincy Krosby, chief global strategist at LPL Financial. “That mistake is in the history books. They were late in what they were supposed to do. They don’t want to make a mistake on that side of the equation.” Specifically, the Fed is facing the question of how quickly and aggressively it should respond when inflation is waning. Here’s what we learned from the latest round of flash data: Consumer price growth slowed to its weakest pace in more than three years, wholesale prices barely rose in July, spending proved much more resilient than expected, and layoffs, after a brief spike a few weeks ago, are close to their long-term trend. To be sure, not all the news is good: Housing remains the weak spot in the economy and appears to be getting worse, judging by the tightening start and permits hitting a four-year low in July. Wages are rising, but only 0.7% faster than inflation. And if you’re looking for inflation, it showed up in imports, where the annual rate of price increases hit its highest since December 2022, albeit at just 1.6%. Ready to Ease Overall, however, the market largely feels the Fed could — and should — start cutting rates next month. “It’s not an exact science. It’s probably as much an art form as it is a science,” Krosby said. “The longer they wait, the more problems they’re going to have. There will be different problems, but they’re going to have problems.” Market prices Friday afternoon pointed to about 3-1 odds of a quarter-percentage-point, or 25 basis points, cut in September, according to CME Group’s FedWatch gauge of federal funds futures. From there, traders see another similar move in November and December, with the final cut this year likely to be a half-point. The biggest concern now is that the Fed is cutting rates because it wants to guide the economy into a much-vaunted soft landing, rather than acting aggressively because it has to, that is, if the labor market collapses or some other crisis occurs. “The market wants rates to be commensurate with falling inflation, not an emergency rate cut,” Krosby said. “The market’s primal fear is that we’re in for a recession, not a shallow one, but a deep one that completely changes the equation.” Former Fed Vice Chairman Richard Clarida, who described himself as a “founding member of the interim team” while he was in office, said he thinks the most likely path now is a quarter-point cut in September. But he also predicted that the August nonfarm payrolls report, due in early September, would have too big an impact, although Powell stressed that the Fed is “data-dependent” rather than “data-point dependent.” “Jay Powell said they don’t want to be data-point dependent, and I think that makes sense. But I want to emphasize that I think there’s a huge amount of weight in what we hear about the labor market,” Clarida said in an interview with CNBC on Friday. “If it’s a catastrophic report, negative payrolls, and a big increase in employment, then we’re going to hit 50. So I think the data is dependent on that first move.” The case for no cut To be sure, not all market participants agree with the cut. Even with the increased emphasis on the jobs picture, Powell and other Fed officials are unlikely to declare outright victory over inflation, and with good reason, said Komal Sri-Kumar, head of Sri-Kumar Global Strategies. While headline inflation numbers are falling, housing-related costs continue to defy expectations that they will trend lower, and a sharp 1% increase in retail spending in July suggests that consumers are tolerating higher interest rates, which is itself an inflationary trend. “You [cut] because inflation is below target … The second reason you would cut is because the economy is weak,” Sri-Kumar said. “Where is the weakness? I don’t think you have any signs that the economy is weak. You don’t have any signs that inflation is under control and you don’t have any signals that the Fed is going to shift its focus.” However, Sri-Kumar said he expects the Fed to cut anyway and that Powell will send a strong signal at Jackson Hole that easier policy is on the way. “He’s probably going to basically give his signal, not only about that, but also congratulate himself for having been successful in reducing inflation significantly,” he said. “So the big market rally doesn’t have to wait until September 18. It’s already started and he’s probably going to give another stimulus when he speaks at Jackson Hole.”