LIVE MARKETS-Markets may be jumping the gun ahead of September's FOMC

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MARKETS MAY BE JUMPING THE GUN AHEAD OF SEPTEMBER'S FOMC

As the September FOMC meeting approaches, Barclays' economics team led by Marc Giannoni thinks that while financial markets are increasingly betting on a rate cut, they may be misreading the Federal Reserve's signals.

At the July press conference, Fed Chair Jerome Powell struck a hawkish tone. He emphasized that rates remain only modestly restrictive and that financial conditions are still accommodative. Powell painted a picture of a solid labor market, arguing that low payroll gains could still be consistent with full employment. He also made clear that the Fed wouldn't overreact to tariff-driven price increases, stressing the importance of keeping inflation expectations anchored.

But since then, the July jobs report disappointed, with downward revisions to the May and June data and a slight uptick in unemployment to 4.2%. Markets quickly pivoted, with traders pricing in at least a 25 basis-point cut in September, also fueled in part by U.S. Treasury Secretary Bessent's call for a 50-bp rate decline.

Still, Barclays believes Powell's July remarks likely wouldn't have changed had he seen the latest data. It adds that the labor market remains tight, and the Fed's reaction function isn't solely driven by headline payroll numbers.

The UK bank notes that market participants may be overestimating the Fed's urgency to act.

In addition, FOMC members remain divided, Barclays points out. Fed Governor Lisa Cook and Minneapolis Fed President Neel Kashkari are voicing concern over economic slowing, while Fed Governor Christopher Waller and Fed Vice Chair of Supervision Michelle Bowman are calling for rate cuts next month.

Others, including St. Louis Fed president Alberto Musalem and Kansas City Fed President Jeff Schmid, are focused on inflation risks. Many key voices have yet to weigh in.

Barclays says if employment is slowing due to structural factors — like aging demographics and immigration trends — rate cuts may be ineffective or even inappropriate. The real question, it points out, is whether risks have shifted enough from inflation toward employment to justify easing.

Overall, the bank sees the September decision a close call. Its base case remains one 25-bp cut in December.

All eyes now turn to Jackson Hole, where Powell and New York Fed President John Williams could either reinforce July's message or signal a shift. If they lean dovish, September cut expectations could solidify—making them hard to reverse, even if incoming data surprises to the upside, Barclays says.

(Gertrude Chavez-Dreyfuss)

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