LIVE MARKETS-Traders expect a September rate cut, will Fed’s Powell object?

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TRADERS EXPECT A SEPTEMBER RATE CUT, WILL FED’S POWELL OBJECT?

The weakening labor market and slowing economic growth have led traders to price in an 85% chance the Federal Reserve will resume rate cuts at its September 16-17 meeting. But a wild card this week may be whether Fed Chair Jerome Powell disagrees.

Powell, who is due to speak on Friday at the Fed’s annual Jackson Hole Economic Symposium in Wyoming, has expressed reluctance to cut rates on expectations that inflation will reaccelerate this summer due to President Donald Trump’s tariff policies.

Consumer price inflation for July showed that the trade levies so far don’t appear to have made a big impact on price pressures, but hotter than expected producer price inflation last month may give Fed policymakers pause.

Powell is seen as unlikely to hint at September’s moves before seeing August’s round of economic data, but with the market seeing a cut next month as almost certain, the question will likely be whether Powell pushes back against the market pricing.

“While we’re not expecting the Fed Chief to pre-commit to any future changes in policy rates, the market will be reaffirmed in the September rate cut assumption so long as Powell doesn’t offer any clear pushback on an imminent Fed move,” Vail Hartman and Ian Lyngen, U.S. rates strategists at BMO Capital Markets, said in a note.

“Powell has an incentive to retain flexibility until August’s economic data profile is known, so it’s unlikely that the Fed Chief ‘locks in’ a September rate cut, even if his openness to such a move is taken as an indirect signal that a rate reduction is on the horizon,” they said.

The Treasury market may also this week begin adjusting for the possibility of Powell sticking to a more restrictive monetary stance.

“My thought is that Powell is still not inclined to cut rates. He may be persuaded to cut by September 17 meeting, however, I think, the yield curve could likely flatten ahead of
his speech Friday in anticipation of a more hawkish tone,” said Tom di Galoma, managing director at Mischler Financial Group.

(Karen Brettell)

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