Fed Chair Powell’s Testimony and Upcoming Data Releases Could Spark Rate Cut Speculation 👀
As the summer heat intensifies, the economic data calendar is about to ignite, and investors are on high alert! Following last week’s job numbers, the spotlight shifts to the Consumer Price Index (CPI) inflation print this Thursday, preceded by Fed Chair Jerome Powell’s semiannual Humphrey-Hawkins testimony to the Senate on Tuesday and the House on Wednesday.
Powell, known for his data-driven approach, will likely tread carefully to avoid surprising investors when assessing the Fed’s dual mandates of maximum employment and stable prices. But the latest economic data is fueling speculation about the Fed’s first rate cut since 2019, especially after last Friday’s unexpected weakness in the unemployment rate. While the Fed is likely to hold steady at its July meeting in three weeks, the odds of a September rate cut have surged to 72% – up from 47% just a month ago! Powell himself hinted at the possibility of a rate cut in September, but only if the data warrants it.
The recent unemployment rate hike to 4.1% has set off alarm bells, bringing the Sahm Rule – a respected recession indicator – tantalizingly close to triggering. This rule warns of a recession when the unemployment rate’s three-month average rises by half a percentage point or more from its low over the past 12 months. With the current reading at 0.43 ppts, the next two employment releases could be the deciding factor.
But even if the Sahm Rule is triggered, the Fed has plenty of wiggle room to do nothing, especially in an election year. Powell has emphasized the need for more evidence that inflation is sustainably moving towards its 2% target. So, if Thursday’s CPI numbers jump significantly, those September rate cut odds might plummet to near zero! Claudia Sahm, the creator of the Sahm Rule, has expressed doubts about its effectiveness in a post-pandemic world. However, she’s been urging the Fed to act soon, warning that recession is a real risk. “The worst possible outcome at this point is for the Fed to cause an unnecessary recession,” she cautioned.
As the job numbers unfold over the next few weeks, we might be bombarded with headlines proclaiming the recession is near. The focus is shifting from inflation to jobs and maximum employment, and the risks for the economy seem to increase right before landing. Buckle up, folks, it’s going to be a wild ride!
