Spotlight - Jackson Hole will not confirm September cut

This Friday marks the start of the Fed’s annual gathering in Jackson Hole. The chair’s annual speech has often been used to signal policy shifts. Last year, Powell chose to very clearly signal an impending cut by characterizing the labour market. Unemployment had risen to 4.3%, and the BLS had just released its annual non-farm payrolls (NFP) benchmarking revision, which lowered employment by more than 800k. Powell then described the labour market as undergoing an ‘unmistakable cooling,’ and used a phrase we consistently heard throughout the latest easing episode: ‘we do not seek or welcome further cooling in labour market conditions.’

Last year, inflation was on the decline, and the labour market was deteriorating, a clear case for rate cuts. This year, inflation is on the rise, and the labour market is deteriorating. On top of that, there is substantial political pressure to lower rates. A decidedly worse place to be as a central banker. Correspondingly, uncertainty is also higher. Reasonable cases can be made for keeping rates steady, for a 25 bps cut, and some are even advocating a 50 bps cut following the NFP revision. Initially, this resulted in markets pricing in more than 25bps of easing for September, but after last week’s PPI data, markets have shifted to about 20 bps, implying an 80-85% probability of a 25bps cut. This means that Powell does not have to give a very strong market-moving signal to keep his options open, which we believe is what he will aim for.

The extent of the labour market decline will be vital in discerning between these three policy options, and at the time of the Jackson Hole speech, Powell will not have full information. In the weeks between this speech and the FOMC meeting on 16-17 September, the annual NFP benchmarking revision will be revealed (and preliminary QCEW data is pointing towards a revision of similar magnitude to last year), and the August labour market report is due to be published, although the new Trump-appointed head of the BLS – ‘EJ’ Antoni – initially suggested that he might not publish new monthly statistics until their models are in order. Luckily, he has since backed off of the idea.

On the other side, policy has remained moderately restrictive in anticipation of tariff-induced inflation. While there are increasing signs of tariffs impacting prices, the overall pass-through has been limited. There are a variety of reasons why prices have yet to reflect the full magnitude of tariffs, including frontloading and policy uncertainty. Still, various indicators show that that inflation bump is around the corner, including the PMI on output prices, and recent PPI data, where the headline figure increased by 0.9% m/m, the largest gain since 2022. The August CPI report, also prepared by the BLS, may or may not reflect this already, but some further evidence of tariff pass-through will be vital for the hawks on the FOMC to make their case. We don’t expect this month’s PCE inflation report to provide that impulse either, with core likely coming in at 0.3% m/m.

In short, we do not expect a clear rate signal at Jackson Hole, but rather a clear message of data-dependence. We do expect Powell to provide a somewhat hawkish interpretation of the labour market, highlighting the lower break-even rate of non-farm payrolls and re-emphasizing the need to consider labour market balance, not just demand (see also our latest research). He will highlight concerns about tariff-induced inflation on the horizon. This should keep markets in between one or no cuts for September, keeping the FOMC’s options open. Powell is also expected to announce the conclusions from the FOMC’s framework review, with the most important change expected to the Fed’s policy of ‘flexible average inflation targeting.’ This policy was introduced in 2019-20 framework review, and was a response to the persistently below target inflation preceding the pandemic, and suggested to target average inflation of 2% over an unspecified period of time. It would imply that the Fed might have to target below 2% inflation for an extended period following the latest inflation wave. Rather, they are likely to take the opportunity to reaffirm a strong focus on the symmetric 2% target. As only one side of the mandate, this would not necessarily reflect a strong hawkish signal for the current juncture.

Our base case remains for the Fed to not cut rates this year, with weak labour supply mitigating the effects of weak labour demand, and tariff induced inflation requiring rates to remain somewhat restrictive. Following the peak of tariff induced inflation, they can start easing in the first quarter of 2026. As detailed above, incoming data, particularly a weak labour market report, may force the Fed to cut as early as this September. We will update our view when all relevant data is available.