Coming into last Friday, the market was pricing in roughly a 75% chance of a rate cut in September. Those odds saw a notable increase after Federal Reserve Chair Jay Powell’s Jackson Hole, Wyoming comments. With Powell acknowledging that it may be time for the Fed to alter its restrictive policy, this could set up stocks for a short-term relief rally, writes Bret Kenwell, US investment analyst at eToro.
Investors got the line they were looking for from Powell when he said that current conditions: “may warrant adjusting our [restrictive] policy stance.” Markets had endured a multi-day pullback ahead of the speech.
Overall, the Fed finds itself in a challenging situation, with inflation picking up and the labor market beginning to deteriorate. As economists have seen in the most recent data, the jobs market can change quickly — a risk that the Fed is well aware of.
Cut rates too much or too early and they risk adding fuel to the inflation fire. Cut too late or too little and they risk a larger breakdown in the labor market — and thus, the economy. This delicate balance is exactly why the Fed finds itself in a difficult position.
But when inflationary push comes to employment shove, the Fed will likely step in to stave off further weakness in the labor market. Rising inflation is still a risk and may prevent the Fed from moving as quickly as it would like. But the committee is unlikely to stand by idly if we see further weakness in the jobs market.
