Powell keeps the door open but what can we expect next? | investingLive

Fed chair Powell kept the door open for a move in September after he acknowledged risks surrounding the labour market and the economy. He noted that such conditions may warrant a policy adjustment, highlighting a “curious kind of balance” in the labour market especially.

That was enough to get markets going with traders and investors taking that as a sign of a more dovish tilt going into September. Fed funds futures now seen ~84% odds of a 25 bps rate cut for next month. And basically, markets will look to the non-farm payrolls release on 5 September to confirm such a move.

Powell did highlight that they are still very much data dependent but by opening the door with his choice of words, it pretty much means a softer set of labour market numbers should confirm a rate cut for September. Now, it’ll be interesting to see how the rest of the voting members feel about the current predicament.

So, what can we expect next from the Fed and market developments?

Well, the simplest scenario is that we see another much weaker jobs report and that will likely confirm a rate cut for next month. However, don’t expect the pressure on the Fed to stop there in such a case. Trump will continue to call for Powell’s head, in trying to influence markets that the Fed is well behind the curve.

And a continuation of softer data will certainly reinforce that argument.

But what happens if the upcoming jobs report is one that comes in stronger? I reckon it won’t put off the narrative of a rate cut but it will certainly leave markets in a bit of a bind. That especially if the Fed pricing we’re seeing here holds until the end of next week.

In that case, there’s only one of two things that could play out next. One, that markets choose to conveniently ignore the data and reaffirm that it just means a soft landing scenario is still well intact. In that case, the Fed need not rush to cut rates but may still choose to kick things off in September. The question is, will markets try to bully the Fed into a decision then?

If so, all the weight is on the Fed’s shoulders to deliver on those expectations i.e. the Fed put. So, Powell & co. will face quite a decision should we see the jobs report hold up and even more so if the inflation numbers the following week also reinforce some form of tariffs passthrough. Yes, don’t forget that we still have another US CPI report to work through but it will come during the FOMC blackout period.

And that’s pretty much how the other side of the coin could play out. That even with Powell’s comments here, he hasn’t exactly fully committed or pre-commit to a rate cut in September. All he has done is leave the door open.

So if there is significant impact from tariffs on inflation and the labour market remains more resilient after the slight scare last month, then what’s the rush? The issue with this argument is that we might still need more time to factor in any form of tariffs passthrough on inflation. We continue to wait on that month after month but even the latest numbers for July were not too significant.

As such, the Fed might not get their reaction function right at the end of the day but perhaps it might not matter too much. That unless the bond market throws up a fuss by kicking and screaming until the central bank listens.