With the minutes of the July FOMC (Federal Open Market Committee) meeting indicating that Federal Reserve policymakers were largely aligned on keeping the federal funds rate unchanged at 4.25 per cent to 4.50 per cent, citing heightened inflation risks, global markets are now focused on Federal Reserve Chair Jerome Powell’s speech at Jackson Hole on Friday morning. This will be Powell’s eighth and final Jackson Hole address, as his term expires in May 2026.
US Fed minutes: At a crossroads
The US Federal Reserve intends to remain data-dependent, but it may not have much time before deciding on a rate cut. Meanwhile, US President Donald Trump has been lashing out at Powell for not lowering rates. Beyond political pressure, there is also dissent among policymakers themselves.
Two members of the Fed committee—Fed Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller—voted against the status quo on rates and favoured a 25 bps rate cut in the last policy meeting on July 29-30. This was a significant development, as Reuters reported that this was the first time since 1993 that more than one Fed governor had dissented against a rate decision.
However, the majority of policymakers favoured keeping rates unchanged, citing the risk of inflation from Trump’s tariff policies.
The Fed has a dual mandate of keeping prices stable and fostering maximum employment.
The US Consumer Price Index (CPI) was stable last month but slightly lower than expected, at 2.7 per cent in July, against market expectations of 2.8 per cent. In June, it rose by 2.7 per cent.
The Fed’s preferred inflation measure, Personal Consumption Expenditures (PCE), rose by 2.6 per cent in June after increasing 2.4 per cent in May. July PCE prints are due on August 29.
However, the jobs market has started showing signs of stress. US employment growth was weaker-than-expected in July. As Reuters reported, US nonfarm payrolls increased by 73,000 jobs in July after rising by a downwardly revised 14,000 in June, the fewest in nearly five years. May and June payrolls were revised down by a massive 2,58,000 jobs.
Experts believe it’s time the Fed bites the bullet and cuts rates.
“The Fed meeting minutes clearly show why they didn’t cut rates at the last meeting – because the majority of officials thought the risk of higher inflation outweighed the risk of higher unemployment – but the far more important question is how they weigh the risks at the next meeting,” Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, observed.
Powell’s Jackson Hole speech in focus
Powell will address the Jackson Hole symposium on Friday. However, given the current complex situation, he may not provide clear signals about the Fed’s next policy move in what will be his final address as Federal Reserve Chair at the annual gathering.
Markets are expecting a 25 bps rate cut in September as the risk of an economic slowdown in the US increases. However, inflation risks have also risen.
Powell’s emphasis on labour market weakness could signal that the Fed is preparing for a rate cut. Although markets have largely priced this in, it is still expected to have some positive effect on investor sentiment.
Conversely, a more hawkish tone from Powell could indicate that inflation remains the Fed’s primary concern, suggesting a rate cut may be further away.
The incoming data remains crucial. If there is no unusual spike in inflation, the central bank may find it easier to lower rates in September.
“On Friday in Jackson Hole, Chair Powell is likely to keep his cards close to his vest, emphasise that the Fed cares very much about their dual mandate and explain that they are data dependent and will need to see the jobs report and the two inflation reports before they can make a determination whether or not to cut interest rates on September 17th,” said Zaccarelli.
“In order for the Fed to cut in September – which we believe they will, unless there is another CPI or PPI disappointment before then – enough of the committee will need to weigh the unemployment risk as greater than the risk of persistent inflation,” Zaccarelli said.
Dr Joseph Thomas, the head of research and an economist at Emkay Wealth Management, pointed out that US headline inflation in the last two months has remained stable at 2.70 per cent, obviously much higher than the Fed’s long-term target of 2 per cent. However, what concerns the markets more is the rising core inflation, which is at 3.10 per cent as per July data.
The real impact of the higher tariffs on the US price level is uncertain, and it may take another two or three months for things to become clearer. However, an adverse impact on the price level cannot be ruled out.
Against this background, Thomas believes the Fed may not cut the base rate unless serious growth challenges arise. But the Fed’s thinking on rates will be more or less reflected in the Jackson Hole address of the Fed Chairman, said Thomas.
Deepak Agrawal, CIO-Debt at Kotak Mahindra AMC, believes that while upcoming macroeconomic data in the USA remains mixed and geopolitical uncertainties persist, the market is currently pricing in an 80 per cent probability of a 25 basis point rate cut by the US Federal Reserve in its upcoming FOMC meeting in September.
Despite growing calls for a more aggressive move, Agrawal believes that, at this stage, the Federal Reserve has no compelling reason to surprise markets with a 50 basis point cut. Instead, it is likely to reduce US rates by 25 bps, maintaining credibility and avoiding unnecessary volatility.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
