By Ben Norris, CFA, Senior Vice President, Senior Investment Strategist
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Federal Reserve (Fed) Chairman Jerome Powell came to the rescue of distressed investors late last week with his appearance at the Jackson Hole Economic Policy Symposium. After five consecutive days of losses, Powell’s highly anticipated Friday speech reassured markets that the Fed is still on track to cut interest rates at its September policy meeting and sent markets sharply higher. Despite Friday’s market reversal, divergent economic data released over the last several weeks have put the Fed in an increasingly difficult position.
As we’ve often noted in the past, inflation remains stubbornly high, and members of the Fed are still split on whether tariffs have a lasting impact on prices. Some are in the camp that inflation is solely a monetary phenomenon. Because the supply of money hasn’t grown meaningfully since March 2022, inflation should continue to work its way lower. There isn’t more money to go around, so consumers will have to spend more on tariffed goods, and less on things such as services. They argue that these two effects net out. Others on the committee are less sure, arguing that the true nature of inflation isn’t so cut-and-dry, and that tariffs are bound to put at least some upward pressure on prices, even if that pressure is temporary.
Unfortunately, the latest readings of inflation have done little to settle the debate. The Fed’s preferred measure of inflation – the Personal Consumption Expenditures Price Index (PCE) – has ticked higher in its last two readings, while the Consumer Price Index has also moved in the wrong direction. Adding to the confusion, services inflation has actually outpaced goods inflation in the more recent reports. To me, the latest inflation data is an argument against rushing to cut rates. Even if tariffs don’t have a meaningful effect on goods prices, services prices are still running hot, which tells me that lowering rates from here could reignite inflation and make the Fed even less equipped to deal with future issues.
The primary argument for a rate cut at this point is the cooling job market. The July jobs report was weak enough to cause concern for investors, the Fed and the White House. Payroll growth has slowed to an average of 35,000 over the last three months, down significantly from 168,000 per month in 2024. In his speech, Powell indicated that the labor market is in a “curious state of balance” where both the supply of and demand for workers is slowing. He went on to note that the “unusual situation suggests that downside risks to employment are rising.” Powell went on to add that “the effects of tariffs are now clearly visible” and “a reasonable base case is that the effects will be relatively short-lived.”
The market took these quotes as a near guarantee that the Fed would cut rates at their September 17 meeting. I think the market is correct in assuming that we’ll get a 0.25% cut next month, but I’m less convinced that policy will ease much further after that. Powell maintained a cautious tone throughout his speech and made it clear that the Fed is still very data dependent. It appears that the Fed is scarred from the embarrassment of calling post-COVID inflation transitory, and they are determined to learn from the past, with Powell reiterating that “we will not allow a one-time increase in the price level to become an ongoing inflation problem.” Three different inflation reports will be released before the Fed’s September meeting, and any one of them could derail the current narrative.
Powell’s speech powered the S&P 500 to a 1.5% gain on Friday, undoing much of the damage done during the prior five sessions. However, the S&P was overshadowed by small- and mid-cap stocks, which gained 3.8% and 2.7%, respectively. Even the Dow Jones Industrial Average, which has lagged the S&P and Nasdaq Composite in recent years, outperformed with a gain of 1.9% and reached an all-time high. Markets have surged since their April bottom, with the S&P gaining nearly 30%. The rally has been largely powered by the technology sector, which has risen more than 50% over the same period. However, Friday’s action was a continuation of a more recent trend where stocks outside of technology and the Magnificent Seven have started to outperform. Second-quarter earnings are a large part of that story, with S&P expected to see 8.9% growth compared to the 2.2% expected just a few months ago. While mega-cap stocks are still doing a lot of the heavy lifting, other sectors are starting to pull their weight and should contribute even more in the coming quarters. With the S&P trading at an elevated 23x forward price-to-earnings multiple, the other 493 S&P stocks will have to come through with strong earnings to avoid any hiccups.
Looking forward to this week, we have a busy calendar of economic reports that includes a reading of second-quarter Gross Domestic Product, an update on PCE, as well as data on the trade deficit and consumer confidence. A variety of members of the Fed will be speaking this week, and investors will be on the lookout for any indications of Fed policy in the months to come.
| TIME (ET) | REPORT | PERIOD | MEDIAN FORECAST | PREVIOUS |
| MONDAY, AUG. 25 | ||||
| 10:00 am | New Home Sales | July | 632,000 | 627,000 |
| Federal Reserve Speakers | ||||
| TUESDAY, AUG. 26 | ||||
| 8:30 am | Durable Goods Orders | July | -4.1% | -9.4% |
| 9:00 am | S&P Case-Shiller Home Price Index (20 cities) | June | — | 2.8% |
| 10:00 am | Consumer Confidence | July | 96.5 | 97.2 |
| WED., AUG. 27 | ||||
| None Scheduled | ||||
| THURSDAY, AUG. 28 | ||||
| 8:30 am | Initial Jobless Claims | Aug. 23 | 230,000 | 235,000 |
| 8:30 am | GDP First Revision | Q2 | 3.1% | 3.0% |
| 8:30 am | Pending Home Sales | July | 0.3% | -0.8% |
| 8:30 am | Federal Reserve Speakers | |||
| FRIDAY, AUG. 29 | ||||
| 8:30 am | Personal Income | July | 0.4% | 0.3% |
| 8:30 am | Personal Spending | July | 0.5% | 0.3% |
| 8:30 am | PCE Price Index (y/y) | July | 2.6% | 2.6% |
| 8:30 am | Core PCE Price Index (y/y) | July | 2.9% | 2.8% |
| 8:30 am | Advanced U.S. Trade Balance in Goods | July | — | -$86.0B |
| 10:00 am | Consumer Sentiment | Aug. | 58.6 | 58.6 |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market