The Fed's Next Move Could Rattle the Markets
Editor's note: The Federal Reserve is finally making its move...
After weeks of political pressure, declining internal support, and softening data hanging over Fed Chair Jerome Powell's head, investors may finally get what they want at the central bank's upcoming meeting. The Fed could opt to cut interest rates following promising labor figures.
According to Joel Litman – chief investment officer for our corporate affiliate Altimetry – this could send shockwaves throughout the market regardless of what the Fed chooses.
In today's Masters Series, adapted from the August 22 and September 2 issues of the free Altimetry Daily Authority e-letter, Joel details how the central bank's decision could impact the markets...
The Fed's Next Move Could Rattle the Markets
Investors have been waiting all year for this moment...
The Federal Reserve enters its September 16 meeting under growing pressure to cut interest rates. And that pressure isn't just coming from the White House... but from Wall Street itself.
Folks are losing patience with high rates, which can stifle economic growth. And some believe the Fed's slow-and-steady approach has been too slow.
The central bank last cut rates in December 2024. Since then, both employment and inflation have held steadier than most expected... two key metrics to support rate cuts.
At the same time, wage growth is softening slightly. Job creation is slowing. Consumer sentiment continues to weaken. All these numbers could get a boost if the Fed slashed rates.
The central bank has every reason to pull the trigger on a rate cut. Today, we'll take a closer look at the data... and why, for the Fed, ignoring the market could be a big mistake.
July's consumer price index ("CPI") data triggered more concern than it should have...
Yes, headline inflation rose 0.2% month over month. And yes, core inflation rose 0.3%. But those numbers don't tell the full story.
Much of the increase came from just a few categories. Airfare jumped 4%, while used-car prices climbed 0.5%.
In contrast, prices for many consumer staples and tariff-exposed goods were flat or even down for the month.
Apparel – much of which comes from abroad – rose just 0.1%. Meats, poultry, fish, and eggs were 0.2% more expensive. Cereals and baked goods were 0.2% cheaper.
Financial-data provider ING says this data shows corporations are absorbing most of the tariff costs, rather than passing them on to consumers.
They may be playing the long game to keep inflation low... and benefit from potential lower rates in the coming months.
At the same time, the July jobs report missed expectations...
Longtime readers know employment data is the second half of the Fed's dual mandate. The central bank wants to see unemployment between 4% and 5%.
So when that number rose to 4.2% in July, investors expected that to be a signal Fed Chair Jerome Powell couldn't ignore.
To understand market interest-rate expectations, we look at the CME FedWatch Tool. It tracks sentiment in the futures market... And right now, it's showing a 95% chance of a rate cut at the September meeting.
Take a look...
Almost the entire market is now pricing in a rate cut.
If the Fed holds steady instead, that disappointment could do more harm than good... even if Powell believes it's the right thing to do.
Inflation and speculation are keeping Powell on edge...
Remember, the Fed's target inflation rate is 2%. But core inflation, excluding volatile food and energy components, remains above that threshold.
Combined with the Fed's benchmark bank-lending rate range of 4.25% to 4.5%, the real interest rate initially only looks modestly restrictive.
That's been a key point for Powell. He has often said that cutting rates too soon risks reigniting inflation. And he has reason to be cautious.
We still don't really know whether tariffs hurt inflation... although recent results suggest they at least somewhat add to it.
But with weakening labor markets, Powell's calculus has had to change. And that's what investors have sniffed out.
That's important because speculative behavior has already returned in full force. Investor optimism and abundant liquidity have caused a resurgence in meme stocks, cryptocurrencies, and other risk assets.
If Powell cuts to help solve the employment picture, that market froth could expand into dangerous territory.
At the same time, the Fed risks rattling the markets by doing nothing...
If the central bank doesn't act, it sends a conflicting message. Either inflation risk is higher than the market believes... or the Fed is content to let economic momentum erode further.
Either option introduces uncertainty. And uncertainty is what markets hate most of all. That's why Powell has spent the past two years trying to engineer a "soft landing." While inflation isn't right at the 2% target, it's not far off. Meanwhile, employment data is clearly slipping... further backing up the rate-cut narrative.
After revisions to the latest jobs report, it showed that U.S. employers added 911,000 fewer jobs in 2024 and early 2025 than previously thought. This marked the largest downward revision ever recorded.
What's more, inflation data from Thursday revealed that the CPI rose 2.9% from a year earlier, further complicating the Fed's rate-cut path.
With all this coming to a head less than a week before its meeting, we will be monitoring the central bank's next decision with even more vigilance.
Regards,
Joel Litman
Editor's note: Joel boasts an elite roster of private clients that includes the top 10 global investment houses and more than half of the world's 300 biggest money managers.
And he recently identified a strange moneymaking phenomenon that could be the biggest breakthrough in the history of his firm. Until September 17, you can get all the details and check it out for free for yourself.