Warning: The Fed Might Not Cut Rates After All
On Tuesday, the Bureau of Labor Statistics posted inflation rates moderating to 0.2% month-on-month. Markets immediately priced in a near certainty for a 25 bps cut next month. Expectations increased for three cuts in 2025.
Two Fed officials voiced dissent on a rate cut. Chicago Fed president Austan Goolsbee and Atlanta Fed president Raphael Bostic both preferred to wait for more clarity. They want to observe the impact that tariffs will have on inflation. The wait-and-see approach is a good call. Excessive rate cuts stimulate the economy and increase demand.
The government collected billions in tariffs, which shows that suppliers are buying more. The risk of a stagflationary scenario increases. Employment is showing signs of slowing rapidly, while inflation is still high.
Golsbee is concerned about core inflation on a rising trend. In July, this inflation, which excludes food and energy prices, rose. Prices for goods and services are increasing. Bond markets continued to price in a rate cut. Both the 7-10 year treasury bill ETF (IEF) and the 20+ year t-bill (TLT) are rising. Bond prices and stock prices are both rising. One of them might sell off while the other rises.
Currently, the S&P 500 (IVV) has better odds of holding its uptrend. TLT stock trades in a range, unable to break out above $89.00. Later this month, the Federal Reserve’s Jackson Hole event will give the market direction on interest rate policy.
