Weekly stock market update | Edward Jones

Digging in to Jackson Hole: Countdown to Rate Cuts

The moment we’ve all been waiting for is not quite here, but the countdown clock is ticking. Last week brought the U.S. Federal Reserve’s annual symposium in Jackson Hole, Wyoming, a monetary-policy red carpet of sorts, where the movie isn’t shown but previews and interviews add detail and anticipation. In this case, “Who are you wearing?” is replaced with “What are you seeing?” and “When are you cutting?” There are no policy decisions made at this meeting, but it did provide a prelude to the Fed’s upcoming official meetings, where expectations for action are high.

Markets spent the week largely treading water, awaiting the latest perspectives from monetary policymakers, including the much-anticipated speech from Fed Chair Powell on Friday. There were no surprise endings, but we do think the commentary provided some takeaways that will be important for markets ahead. Here are three of our key takes for investors:

1. The wait is over, but the goalposts have moved

• A September shift: Markets have been fixated on – and driven predominantly by – the timeline to Fed rate cuts for the better part of the last year. The wait is almost over, as we think the commentary from Chair Powell is consistent with our (and the prevailing) view that interest-rate cuts will commence in September.
   

  The Fed has held its policy rate steady for more than a year now, with the extended pause stemming from the fact that the central bank’s dual mandate (stable inflation plus maximum employment) was not yet in a position that could warrant a change in policy settings. Our interpretation of the Fed’s commentary last week is that officials now see sufficient movement on that mandate to begin adjusting rates. 
   

• Not just inflation anymore: Importantly, however, we think the Fed’s focus, in terms of the data guiding policy decisions, is shifting. With U.S. unemployment running below 4% from February 2021 to April 2024 (for perspective, the average over the last 40 years has been 5.8%), the employment side of the mandate has not required much attention. Conversely, with U.S. core inflation averaging 4.7% over the last 24 months (compared with a 40-year average of 2.9%), the Fed has focused policy moves squarely on bringing down inflation¹.
   

  With the trends in inflation and employment now both on the move, and with the economy showing a bit of fatigue recently, we expect the Fed’s attention will now be more balanced, with an effort to support the labor market and economy playing a more prominent role in upcoming rate decisions.
   

  • Progress on prices: The inflation fight has not yet been won, but with U.S. core CPI (consumer price index) at 3.2%, having declined for four straight months and now sitting at its lowest reading since April 2021, we think sufficient progress has been made for the Fed to be able to ease monetary policy. Recent underlying price data suggest to us that the rate of inflation should continue to moderate and will not require the current restrictive interest rates to do so. With CPI in Canada running below 3% each month in 2024, including last week’s reading of 2.5% for July, the Bank of Canada began cutting rates in June of this year¹.
     

    U.S. inflation has moderated, but there’s more work to do.