We’re one day out now.

Just one more day until we hear from the Federal Reserve about its thoughts on “Reassessing the Effectiveness and Transmission of Monetary Policy.”

A more honest name might be…

Does Monetary Policy Actually “Work”?

Or perhaps…

Do We Have Any Idea What We’re Doing?

But I digress.

As dry and dull as the name of this year’s Jackson Hole symposium focus is – and, let’s face it, it is pretty dry and dull – investors everywhere have been waiting with bated breath to hear its conclusions.

We still won’t know whether a September rate cut will or won’t happen. Not for sure. The FOMC won’t meet until next month.

But the clues to be gleaned about September and what “reassessing” it might entail? All market-oriented eyes will be trained on the Fed to read into the situation whatever they can.

Now, speaking of reading into, I do have to point out that people see what they want to see more often than not. One person or outlet will interpret Fed Chair Jerome Powell’s statements as dovish at any given time. Another will insist they were hawkish.

All based on the same press release or appearance.

Nor are the educated, experienced experts much better in this regard. How many times have they gotten it wrong in the past few years based on their own erroneous opinions?

Case in point: All those expert predictions for six rate cuts going into this year. So far, at least, we’ve had zero.

I don’t say any of this to mock anyone. After all, I’ve made inaccurate economic calls before myself, and nobody has a crystal ball.

So my point is twofold:

  1. Recognize the flaws of human interpretation

  2. Act accordingly

In other words, do your best to set aside your biases tomorrow and truly listen to what Powell really says.

Then don’t get caught up in the speculation either way.

There’s Always Plenty of Factors in Favor of a September Rate Cut

With that said, I am still predicting what I’ve already predicted about a September rate cut (and one more cut after that). And I expect that whatever Powell says tomorrow will reflect that prediction.

The rate of inflation is, after all, on the decline since its painful peak in 2021.

Source: (Statista)

That last dot there represents July, which came in at a 2.9% year-over-year change – the first time since March 2021 that inflation was under 3%.

And while Powell repeatedly said in the past that he wanted to see inflation drop all the way to 2%, he’s more recently changed his tune. Now he talks about only needing reassurance that rates are on their way to that preferred percentage.

We also have to remember the jobs situation – another one of the Federal Reserve’s focuses. And, as we learned yesterday, that isn’t nearly as rosy as we’ve been led to believe for months.

Employers, it turns out, added 818,000 fewer jobs between April 2023 and March 2024 than previously thought. That made it the largest downward revision since 2009. The Bureau of Labor Statistics reported that job growth averaged 174,000 a month during that time instead of the 242,000 originally reported.

You also have to consider July’s weak numbers, where employers added even fewer jobs… just 114,000. While that could be revised too, either up or down, the original estimate was far, far less than expected.

It also helped bump unemployment to 4.3%, its highest level since October 2021. Though, to that, I do have to point something out. While this kind of figure does tend to precede a recession – which I still expect, as I wrote yesterday – some economists think July was a fluke, not the start of a trend.

One of the factors they legitimately point to is how badly Hurricane Beryl disrupted the state of Texas. With power outages that lasted a week-plus, there was a significant amount of economic damage.

Again, we need to consider all the facts, not just the ones that support our preconceived notions.

My Final Thoughts Before Friday’s Testimony

Again, there isn’t an actual rate cut decision in the cards tomorrow one way or the other. We’ll only get general comments on the economy and whether Powell and his Fed chiefs think we’re on an overall positive path or not.

So get ready for the speculation… and brace yourself against the inevitable market movements we’re bound to see.

If it goes the way I expect it to, don’t get too excited. Refrain from bouncing into positions you have no business buying if the markets shoot up on further indications of a rate cut.

And if, for some reason, Powell decides to make hawkish comments that indicate rates aren’t going to budge after all… don’t go selling stocks you have no business selling.

Keep a long-term mindset no matter what, focusing on the fundamentals.

I will say, however, that a September rate cut would relieve pressure on companies and consumers alike. Right now, they’re paying more to borrow money, and that is having an effect on the entire economy.

Remember what I wrote yesterday concerning that Wall Street Journal piece, “5 Big Takeaways From This Earnings Season.” While S&P 500 companies were “on pace to deliver a 5.2% jump in revenue from a year earlier,” that seemed “driven by cost-cutting and one-time items rather than strong underlying performance.”

A rate cut would have an immediate impact on short-term loans such as credit card debt and adjustable-rate mortgages. Both would help consumers, who would then have more money to help companies grow as well.

I read something on MSN the other day that read:

Since January, Fed Chair Powell has said that the Fed is balancing the risk of easing too soon, which could lead inflation to stay stubbornly high, against the risk of moving too late, which would open the door to unnecessary labor market weakness.

On Friday, Powell will likely say that inflation has eased to the point where the risks are now tilted toward waiting too long. Although the soft July jobs report may have been weaker than it seemed due to the effects of Hurricane Beryl, hiring momentum has clearly slowed.

I couldn’t agree more, though I’m the first to admit it’s the easy conclusion to come to. The current facts all seem to add up to a September rate cut, and I expect Powell won’t say a single thing to disabuse me of that belief tomorrow.

With that said, I’ll still repeat the caution I began with. No matter what happens tomorrow, no matter what happens in September, no matter what happens in general…

Take the long-term view. It’s always worth the wait.

Regards,

Brad Thomas
Editor, Wide Moat Daily