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Since inflation in America peaked at 9.1% in June 2022, the U.S. Federal Reserve has made controlling price increases — by keeping interest rates high — its main goal.One consequence of tight monetary policy tends to be a slowing economy and a cooler labor market. For a while, that scenario didn't materialize, leading many to think the Fed, under chair Jerome Powell's piloting, had achieved the rare "soft landing," in which the central bank manages to dampen inflation without plunging the economy into a recession.

But that "golden path" — as the Fed's Austan Goolsbee likes to term it — is being tarnished by factors such as tariffs and a changing geopolitical landscape.In the U.S., this has led to a rapidly cooling labor market, prompting Powell to note at Jackson Hole that the risk between high inflation and high unemployment is "shifting." In other words, the central bank might now turn its attention to supporting employment, rather than slowing price increases.

"The shifting balance of risks may warrant adjusting our policy stance," Powell said.And then — boom! Just like that: a glimpse of a shadow of a suggestion that the Fed might start lowering interest rates again was enough to send U.S. stocks surging and Treasury yields falling on Friday.This proves how much the Fed — and, particularly, its chair — remains the nerve center of the U.S. economy and financial markets. As analysts of antiquity put it: all roads lead to Jerome.

What you need to know today

Jerome Powell indicates rate cuts may come soon. At Jackson Hole on Friday, the Fed chair said growing downside risks to the labor market may "warrant adjusting our policy stance." Powell also emphasized the Fed's independence.The U.S. government takes a 10% stake in Intel. The U.S. chipmaker, in a Friday press release, said the White House made an $8.9 billion investment in Intel common stock, purchasing 433.3 million shares at $20.47 per share — lower than the current price.

Furniture will face tariffs later this year, Trump said. The president's goal is to "bring the Furniture Business back … all across the Union." Separately, Canada on Friday removed many of its retaliatory tariffs on the U.S. — but not ones on autos and steel.U.S. stocks popped Friday on Powell's speech. The Dow Jones Industrial Average hit a fresh high, while the S&P 500 came within three points of its record during trading. The U.K.'s FTSE 100 closed at another high for its best week since May.

Nvidia and inflation in focus. U.S. stocks could end August on a high note. Their continued rally will depend on Nvidia's earnings report, out Wednesday stateside, and the personal consumption expenditures price index, out Friday.

Source: CNBC

At a divided Federal Reserve, policymakers pushing for lower interest rates look close to getting their way after Chair Jerome Powell on Friday opened the door to a cut in September.

The debate over what happens after that is likely to begin even before the Federal Open Market Committee meets Sept. 16-17 in Washington. And there’s no guarantee that more cuts will follow any time soon.

Some officials will want multiple cuts, a second group will only commit to one move and still others will object to any cuts at all, said Stephen Stanley, chief US economist at Santander US Capital Markets LLC.

The result, Stanley concluded: “The September message will probably be, ‘One cut and we’ll see what happens.’”

In what was likely Powell’s last speech at the US central bank’s annual gathering in Jackson Hole, Wyoming, the Fed chief pointed to mounting risks to the labor market.

“The shifting balance of risks,” Powell said, “may warrant adjusting our policy stance.”

That long-awaited signal for an approaching cut came amid unrelenting pressure from the White House for lower borrowing costs. President Donald Trump dismissed Powell’s remarks as “too late,” but financial markets rallied, causing stocks to surge and Treasury yields to drop.

But Powell’s words fell well short of a guarantee. He took care to warn of continued inflation risks, saying tariff effects on consumer prices are “now clearly visible,” and it’s possible “the upward pressure on prices from tariffs could spur a more lasting inflation dynamic.”

“As you think about the fact that there are two-sided risks and that there are very divergent views on the committee, I think the easiest path ahead is for a slow path of rate cuts,” said Matthew Luzzetti, chief US economist for Deutsche Bank. Policymakers could begin that process next month, “with further action being more data-dependent beyond that,” he said.

After lowering rates by a full percentage point last fall, policymakers have held them steady this year out of concern that Trump’s tariffs could reignite price pressures. Inflation is still above the Fed’s 2% target.

But as risks to the labor market become more apparent, and with the timeline for tariff-related price changes extending, officials are moving closer to a rate reduction next month that may be framed as a compromise.

Powell did not commit to a specific time frame in his remarks, in which he said the labor market was in a “curious kind of balance” resulting from a marked slowdown in both the supply of and demand for workers. He also made clear that it was far from decided how tariffs will ultimately affect inflation. Still, he signaled that policymakers may need to adjust rates before they have full clarity on that question.

Powell heads into his final months at the helm of the Fed — his term as chair expires in May — facing a delicate challenge. He must generate consensus among policymakers with competing views over the appropriate path for policy. Projections released in June showed the majority of policymakers saw the central bank lowering rates at least two times this year. But a significant minority favored no cuts at all in 2025.

Recent comments from policymakers suggest that divide persists, with some officials open to cutting rates multiple times this year. That includes two Fed governors — Christopher Waller and Michelle Bowman — who dissented over the July decision to stand pat. Each pointed to signs of weakness in hiring, and appeared vindicated by a surprisingly poor July jobs report released two days after the meeting.

White House Council of Economic Advisers Chair Stephen Miran — whom Trump appointed to fill a temporary slot on the Fed’s Board of Governors that expires in January — will bolster that group once he’s confirmed by the Senate, though the timing is uncertain.

Another group has signaled they are not sure the Fed should be lowering borrowing costs at all. With inflation still running above the Fed’s 2% target, they’ve remained wary of the risk that lower rates could fuel price pressures and push up inflation expectations — which they believe can, by itself, push prices and wages higher.

Cleveland Fed President Beth Hammack said Thursday she would not support lowering rates if officials were meeting this week. Kansas City’s Jeffrey Schmid was even more hawkish, telling Bloomberg’s Odd Lots podcast that he wouldn’t dismiss a scenario in which rates went up.

A third cohort of officials have signaled support for an approach in which the Fed lowers rates once and then pauses before making another move to gauge how the economy responds. “Today, I think my strategic approach would be ‘move and wait,’” Atlanta Fed President Raphael Bostic said last week.

But after the dismal July jobs data, some policymakers have signaled they may be running out of time to wait for a clearer picture of how tariffs will ripple across the economy before the labor market is tipped into a downturn.

“If the best of all the options is we make some adjustments and then we have to pause, or even then we have to reverse course, that might be better than just sitting here on hold until we get clarity on tariffs,” Minneapolis Fed President Neel Kashkari said earlier this month.

Powell spoke to the labor-market risks Friday, acknowledging that weakness can rapidly spiral.

“Downside risks to employment are rising,” he said. “If those risks materialize, they can do so quickly in the form of sharply highers and rising unemployment.”

Fed officials will issue new forecasts at their gathering next month. Continued division would lower the odds that a move next month will lead to a steady string of rate reductions.

“Investors should not underestimate the current tension within the dual mandate of price stability and maximum sustainable employment,” Joe Brusuelas, chief economist at RSM US LLP, wrote in a note to clients.

To Brusuelas, a modest reacceleration in hiring, especially if coupled with a continued move upward in inflation, would point to a “one-and-done scenario.”

Source: Bloomberg Europe

Source: Reuters

Source: Bloomberg Europe

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