Three questions awaiting Jay Powell at Jackson Hole
You’ve got to feel for Jay Powell. It’s August. He’s heading off on his annual jolly to the middle-of-nowhere in the American wilderness. Perhaps a few espresso martinis, the odd panel discussion about niche academic topics that nobody really cares about?
Sadly not, because this year, the Fed Chair is on the back foot – and not just because his boss is breathing down his neck. Here are three key questions he’ll be facing at next week’s Jackson Hole appearance.
Are tariffs having any impact on inflation?
The Fed worries that tariffs – a one-time boost to prices – will fuel a long-lasting bout of inflation. But this week’s CPI data raised a simpler question: is there any sign that tariffs are lifting prices in the first place? Core CPI rose faster on a monthly basis, but not due to tariffs. Excluding cars, goods inflation was milder than it was in July.
Someone has to pay, of course. And my back-of-the-envelope calculations put the cost at 2.5% of consumer spending. But import prices are still rising, which tells us it’s not foreign producers who are footing the bill. That leaves corporates absorbing the hit. As our man in New York, James Knightley, told us during our latest webinar this week, the share of small firms hiking prices is little changed from last November.
That hints that firms simply lack the pricing power to pass all of this on, something that’s surely bad news for growth and earnings. Yet oddly, producer price data shows retail and wholesale margins expanded in July.
So the jury’s out on who’s paying. And maybe there’s a simpler explanation, which is that firms are leaning on stockpiles built earlier this year, delaying the need to lift prices. Retail inventories have dipped slightly this year, especially in autos, which, despite hefty tariffs, have actually dropped in price.
Some further inflationary pressure is inevitable. But with key areas of the service sector – notably rents – set for slower price rises over the coming months, inflation needn’t be a barrier to cutting rates in September.
Is the jobs market really not getting any weaker?
It was only two weeks ago that Powell told us he doesn’t think the jobs market is getting any weaker. And then barely 48 hours later, big downward revisions to payrolls not only suggested that the jobs market was very much weakening, but that it was potentially flirting with recession.
At least Powell doesn’t have to talk about this at Jackso– sorry, what’s that? The whole conference is titled “Labour Markets in Transition”? Ah, awkward…
So what should he say? You’ve got to imagine he’ll double down on his argument that the unemployment rate is a much better guide of job market health than payrolls right now. And potentially that the President’s immigration rules are bearing down on worker supply, creating a more nuanced backdrop to those shocking May/June jobs figures.
The problem with that narrative, as James K argued in the webinar, is that if there were genuine shortages of workers emerging, you’d be seeing the impact play out in higher wage growth. And that’s not happening right now.
He’s inclined to take the recent payrolls shocker at face value, particularly given that some of the other surveys – like the ISM Services and University of Michigan confidence indices – are also pointing to a weaker hiring
How divisive will September's meeting be?
Ok, we’ve yet to confront the real elephant in the room: Powell’s tug-of-war with the White House over Fed independence. September’s meeting could be explosive.
Treasury Secretary Scott Bessent wants a bold 50bp cut. But as James K asked in our webinar, could Trump’s temporary appointee Stephen Miran push for even more – and would Fed board members like Christopher Waller or Michelle Bowman, both seen as future Chair contenders, follow suit?
That may be unlikely, and Miran may not even be confirmed in time. And the latest data doesn't scream a need to go bold just yet.
Still, his brief stint could preview how the board might respond to a dovish Chair. Would they fall in line or resist? And would Powell stay on?
At Jackson Hole, though, Powell faces a more immediate challenge. A September rate cut is fully priced by financial markets. Does he push back?
Ideally, the Fed wants flexibility, especially with one more jobs and inflation report due. But signalling that now means guessing the data – something Powell won't want to do. And that's before considering whether he can shake market conviction in a September cut, even if he wanted to.
Where investors are more divided, it seems, is on what happens beyond September. This week's webinar audience was roughly equally split three ways in expecting either one, two or three cuts through the remainder of this year. We're very much in the latter camp, looking for a slightly more rapid string of cuts than markets currently expect.
