How work, inflation releases could affect the Route of the Fed Policy

Fed I: Markets listen to Powell Cooing

We expected Fed President Jerome Powell When he spoke In the symposium of Jackson Hole of the Fed on Friday. We expected him to agree, expressing the need to wait and observe more data before committing to another round of relaxation of monetary policy. The financial markets expected him to be misleading, and they were right, more or less.

Investors have believed that A is probable in September since the weakest of the expected. We have been pressing against this scenario. Powell did not push him. He did not try to restore expectations. That caused the markets to be even more convinced that a rate cut is approaching.

In previous discussions about monetary policy this year, Powell said repeatedly that the Fed is not in a hurry to reduce interest rates. He didn’t say that on Friday. The prayer in Powell’s speech that fed the Great Rally of the stock market on Friday was the following:

“However, with policy in restrictive territory, the reference perspective and the changing balance of risks can justify adjusting our policy position.”

In other words, FOMC could reduce the federal funds rate at the September meeting.

He does not say that Powell included many coverage clauses in his speech. Immediately after launching more gasoline in the metup of the stock market, he said:

“Monetary policy is not in a pre -established course. FOMC members will make these decisions based solely on their data evaluation and their implications for the economic perspective and the risk balance. We will never deviate from that approach.”

Those were their final comments on the short -term perspective for monetary policy, which remains dependent on the data.

Powell did not mention that before the next FOMC meeting in September, there will be two important inflation indicators and another employment report. Presumably, the FOMC decision in September will depend on these data points. We continue to think that they could confirm that inflation remains stuck around 3.0%, a complete percentage point above the inflation target of 2.0% of the Fed.

We also anticipate that payroll increased 100,000 in August. That would be an increase of 73,000 in July (which will probably be reviewed) and confirm our opinion that the weakness in payroll gains during May and June was attributable to Trump’s tariff agitation, which has decreased since then.

Powell discussed the current situations of employment and inflation:

1. Employment

In the Employment Front, Powell said that the growth of payroll works slowed at an average rate of only 35,000 per month during the last three months, below 168,000 per month for 2024 (Fig. 1 below). But he also observed that the deceleration in employment growth has not “opened a great margin of slack in the labor market” (Fig. 2 below).

The unemployment rate, he said, has been historically low and widely stable during the past year (Fig. 3). “Other indicators of labor market conditions also change little or have softened only modestly, including nights, dismissals, relationship between vacancies and the growth of the nominal salary” (((((((Fig. 4).

The most important thing, in our opinion, Powell declared that

“[l]Abo Supply has softened in line with demand, abruptly reducing the job creation rate ‘Breakeven’ necessary to keep the unemployment rate constant. In fact, the growth of the workforce has significantly slow down this year with the strong fall of immigration, and the rate of participation of the workforce has been reduced in recent months ”(((((((((((((((((((((((((((((((((((((((((((((((((((((((Fig. 5 under and Fig. 6).

In other words, the growth of the most slow monthly payroll is not an obvious trigger for food flexibility.

However, curiously, Powell concluded that “while the labor market appears in balance”, “suggests that the downward risks for employment are increasing. And if those risks materialize, they can do it quickly in the form of very high layoffs and an increase in unemployment.”

In our opinion, that is a strange conclusion.

2. Inflation

In the front of inflation, Powell said that the current estimate for the July inflation rate shows an increase of 2.9% a/a. He said that “it is based on the latest data available.” It was 2.8% in June (Fig. 7 below). He estimated that the central prices of the goods increased 1.1%, “a notable change of the modest decrease observed in the course of 2024” (Fig. 8 below).

He pointed out that the inflation of housing services is falling, while the inflation of services that are not “are” a little above what has historically been consistent with inflation of 2 percent “(Fig. 9).

All eyes will be in July, which will be launched on August 29. The central rate could be a little hotter than Powell is waiting. Cleveland’s Fed Inflation that is now marrying It is tracking it to 3.0% a/a. August will be launched on September 11. It is a follow -up of 3.1%.

If the FOMC stands on September 17 after such numbers, Powell will have to explain that the committee has judged that tariffs are having a transitory impact on maintaining inflation around 3.0%, but soon it should be falling to 2.0%. Bond guards may not be persuaded.

The August Employment Report will be published on September 5. Naturally, all eyes will be on the payroll employment gain (or loss). Equally important can be the reviews in the figures of June and July. Again, we expect a gain of approximately 100,000, which should be close to the monthly rhythm of Breakeven Powell.

Fed II: Fueling to Metup

In his speech, Powell mentioned the word “stability” 11 times in the context of the double mandate of monetary policy, which is to maintain low and stable unemployment and inflation rates. He did not mention that they cannot be achieved without financial stability.

A week ago, we wrote:

“The actions will increase with the expectations of another before the end of the year. What could be a better development for the stock market than another Fed, when the economy does not need the help of the Fed?

Wild Rallies on Friday at the S&P 500 and the confirmed our evaluation. So did the expansion of the stock market to more risky risk assets, such as the “actions of history” that have a good narration but there is no profits to show.

We conclude our analysis a week ago as follows:

“For the Fed, a stock stock market increases the probability of financial instability. The legal mandate of the Fed is to keep both unemployment rates and inflation rates. Doing so requires financial stability. That should be the third mandate of the Fed, since the Fed was originally created to avoid financial crises.”

Powell did not mention that reducing interest rates could weaken financial stability. The notion was barely mentioned in the minutes of the meeting of July 29-30 of the FOMC:

“In their discussion about financial stability, the participants who commented on prominent vulnerabilities to the financial system that evaluated justified monitoring. Several participants observed concerns about the high assessment pressures of assets.” That’s all, friends!

Expectations for a quarter quarter rate increased after Powell’s speech, according to the CME group Fedwatch tool. The powerful and wide concentration of the stock market on Friday in response to Powell’s comments suggests that investors are delighted with the perspective of another fed whore, especially if the economy really does not need it. The highly high valuation multiples were even higher after Powell’s speech, which insinuated that the Fed is now ready to consider rates again.

We are staying with our goals for 6600 at the end of the year 2025 and 7700 at the end of next year. That is our base case scenario with a subjective probability of 55%. We currently assign a subjective probability of 25% to a meltup that lifts the S&P 500 to 7000 for the end of the year 2025 and 20% of probabilities to a correction in the index at the end of this year (Fig. 11 below).

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