Powell Opens Door to Rate Cuts
In his Jackson Hole speech, Chair Powell suggested that downside risks to employment are rising and opened the door for lowering rates in September, in line with our expectation for a 25bps cut. While recent political pressure signaled the chance for a larger cut, we believe that the Fed will remain cognizant of growing signs of tariff-driven inflation despite softer labor market data.
What does this mean for investors?
We remain neutral overall equity allocations but focus on quality within those allocations. We are also entering a seasonally weak period for equities and will evaluate the extent and nature of any selloff for potential to increase our equity allocation in coming months.
3 Things to Know
Economic Data Releases Will Be Key to Fed's Decision
While a data-driven approach will likely dictate the duration and magnitude of the next leg of this cutting cycle, Chair Powell's dovish tilt this week confirms that policy rates will move lower.
This should provide further support for beaten-down, financing cost-sensitive areas (like real estate), with a potential risk of re-accelerating inflation and pressuring longer-term rates higher. Overall, this dynamic supports our underweight duration positioning.
The Fed’s Challenging Position on Its Dual Mandate Aligns with Our Macroeconomic View
We would classify the US hiring environment as "frozen" — but not necessarily deteriorating. While employers have been cautious in their hiring behavior, wage growth remains slightly ahead of inflation and the unemployment rate has been relatively stable.
On the other side, we view the inflation outlook as more concerning. While the disinflationary trend in services (led by rents) has kept headline inflation more contained, there is growing evidence that tariffs are beginning to exert upward pressure on goods prices.
We also note that inflation expectations remain elevated, and a growing number of retailers have warned consumers to expect higher prices in the coming months as their pre-tariff inventories are depleted. On balance, this creates a challenging setup for FOMC meetings later this year — a labor market that has yet to fully crack and a potentially accelerating inflation environment.
Powell’s Confirmation of Coming Rate Cuts Drove Renewed Appetite for Risk
Despite the repricing of Fed cuts driving moments of strength in lower-quality, interest-rate sensitive areas of the equity market (such as unprofitable and highly-shorted names), we question how sustainable this type of rally can be in an environment of slower growth and elevated inflation.
We are still in the early innings of companies digesting their changing cost structures, and margin pressure may materialize later this year.
See our weekly CIO Strategy Bulletin for more details