Expectations

At the July FOMC, Powell exhibited a hawkish posture, pointing to continuous labor market resilience and the unknown potential for tariffs to drive inflation as reasons to keep rates where they are (above neutral). These comments were made prior to both lackluster July Payrolls and a scorching hot July PPI. As a result, the consensus going into Jackson Hole was that the Fed would feel validated by the hot PPI and stable employment rate to maintain this hawkish stance. Concisely, we expected Jackson Hole to confirm the Fed was leaning hawkish.

Reality

The reality is that this was a balanced speech with a dovish lean. Below is the paragraph that matters most. I’ll comment on the other side.

In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.

1. He acknowledges the Fed framework requires balance in addressing both sides of the mandate. Prior to today, many assumed the Fed was prioritizing inflation because of PPI and despite July Payrolls.
2. He recognizes policy is in “restrictive territory” and that “the shifting balance of risks” may warrant a change in policy.

This is soft-pivot language. Instead of focusing on inflation, we’re going to focus on the labor market. Net-net, this sounds more similar to 2024’s Jackson Hole speech than not. It suggests the Fed is preparing for cuts to buoy the labor market.

I can read and hear the same as most. I see that the Fed Chair said “may.” Of course, he did. When have you known Powell to box himself in? Did you want him to say “definitely”? I don’t understand people paying attention to that. He’s keeping the committee’s options open. Here’s a better topic to spend time discussing: what if we get upside, inflationary surprises on August CPI and/or PPI?

A Soft-Pivot

The effects of tariffs on consumer prices are now clearly visible… A reasonable base case is that the effects will be relatively short lived—a one-time shift in the price level. Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.

If this was a stance he held in July, it didn’t come through during the presser. This is the soft pivot. By taking the stance that tariff-inflation will be transitory — which, again, is not the vibe we got from Powell in July — you don’t necessarily need to adjust monetary policy for it. This implies a cutting-bias.

Tying it all together to answer the question from the prior segment: Powell has set the Fed up to cut even if we see some inflation show in August data that will be released ahead of the next FOMC meeting and interest rate decision. If we see egregious upside in CPI or PCE for August, the probabilities will adjust accordingly, but… the market isn’t stupid. The market knows that August CPI and PPI come ahead of the September FOMC meeting. Even when accounting for this, there is agreement across financial markets — short-term and long-term bonds, equities, futures, and even event contracts (PolyMarket) — that we’re getting a cut, which means those events aren’t expected to derail this course.

Keep Your Head

Peak optimism?

Could the news flow get better than right now? I don’t see how. Beyond Nvidia’s quarter this coming Wednesday, the market is short on bull-catalysts. That doesn’t mean the market needs to go down, it just means you need to temper upside expectations.

Tariffs are real.

Someone is paying them. If it isn’t the corporations, then it is you. Maybe it’s a combination of both. The market seems to be underappreciating that risk. Most recently and most notably, Walmart’s management called them out on their earnings call. A lot of people shop there, meaning more of the household budget is about to be taken up by essentials, leaving less for everything else. That said, I don’t view this risk as recession risk. It is company-/sector-specific risk. It’ll hurt certain areas more than others. Rotation can mask it.

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