Ahead of Federal Reserve chair Jerome Powell’s Friday speech at the central bankers’ conclave in Jackson Hole, four (and counting) Fed governors spoke up to cast doubt on the inevitability of a 25 basis point interest rate cut at the Fed’s September 17 meeting.
Odds of a cut at the meeting plunged on the CME FedWatch tool today, Thursday, August 21, falling to 75% from 82.4% yesterday and 92.1% a week ago.
Cleveland Fed president Beth Hammack said Thursday that the case for cutting interest rates in September would be a hard one to make given recent economic data. “There’s a lot of data we’re going to get between now and September and I walk into every meeting with an open mind about what the right thing to do is, but with the data I have right now and with the information I have, if the meeting was tomorrow, I would not see a case for reducing interest rates,” Hammack told Yahoo Finance at the Jackson Hole Economic Symposium.
Kansas City Fed president Jeffrey Schmid, seconded that view and described the current condition of monetary policy as “modestly restrictive.” Schmid said inflation risk still outweighs risks to the labor market.
Chicago Fed president Austan Goolsbee and Atlanta Fed president Raphael Bostic on Wednesday both said they’d prefer to gain more clarity around the impact tariffs have on inflation before determining whether to cut rates.
Goolsbee said he’s waiting to see whether tariff-induced inflation could prove persistent. Likening tariffs to “throwing dirt in the air,” Goolsbee said he’s trying to figure out whether inflation and employment are still moving toward their goals of 2% and maximum employment, respectively.
“If you start seeing prices go up and you start seeing employment go down, because tariffs, in my view, are a stagflationary shock, it makes both sides of the mandate go bad at the same time, and that’s the worst position that a central bank could be in because there’s not an obvious answer of what you do,” Goolsbee said. Goolsbee cautioned that if we get more data like the latest Consumer Price Index report, which showed “core” inflation–which excludes volatile food and energy prices–rising on account of higher goods and services prices, that would be concerning.
Core inflation rose 3.1% over the prior year in July and rose 0.3% from the prior month, the most in six months.
Speaking at a luncheon in Alabama on Wednesday, Bostic noted that a 4.2% unemployment rate remains historically low, suggesting the balance of risks remains tilted toward inflation. July’s jobs data, which showed a slowdown in hiring and sharp downward revisions to prior months, raises the possibility that “maybe the risks [between inflation and employment] are more imbalanced and we should be thinking about our ability to be patient as much less than it was before,” Bostic said. Bostic said he still sees just one rate cut this year as appropriate.
In July, the US economy added 73,000 jobs, while job gains for May and June were slashed by a total of 258,000 due to revisions. This brought the three-month average payroll gain down to a mere 35,000.
Do I need to remind anyone that if the Fed doesn’t cut at the September meeting, the financial markets will be disappointed? And “disappointed” doesn’t begin to describe the reaction in the Trump Administration where officials have been arguing for a 50 basis point cut in September.
