I’m less worried about another rate hike than I was a couple of weeks ago. The inflation data is moving in a better direction, and that matters for the stock market even if the Fed doesn’t cut rates.
A lot of the discussion gets reduced to whether we’re getting a cut. But if the concern was that the Fed would have to make money more expensive again, simply taking some of that pressure away can help. The market doesn’t need everything to be perfect to respond well.
Look at what is driving inflation
July’s inflation report showed consumer prices rising 0.1% for the month and 3.4% over the year. Core inflation, which leaves out food and energy, came in at 0.2% for the month and 2.5% over the year.
The distinction matters because energy has been a big part of the pressure. In July, energy prices fell 1.5%, including a 2.9% decline in gasoline. That gave the headline number some relief.
There is still inflation in services, and one report doesn’t settle the whole argument. But when I look at the underlying numbers, I see more reason for the Fed to be patient than to rush into another hike.
For anyone who doesn’t follow this every month, the reason I pay attention to inflation and employment is fairly straightforward. Those are the two big considerations for the Fed. If inflation is too high, the Fed has a reason to make borrowing more expensive. If the labour market is weakening, it has a reason to be more careful about doing that.
The combination I’d like to see is inflation continuing to ease while employment holds up well enough to keep the economy growing. There’s a big difference between an economy cooling down a little and an economy heading into a recession.
Lower inflation alongside stable growth would be a good outcome. Lower inflation because demand is falling apart would give us something else to worry about.
Markets move before the meeting
Keep in mind, investors don’t wait for the Fed to announce a decision before they react. They look at the data and change what they think is likely to happen next.
If another hike becomes less likely, that can take some pressure off bond yields and the dollar before the policy rate changes at all. It doesn’t have to happen neatly or all at once. But expectations are part of what moves financial conditions.
That’s why I don’t think it makes sense to look at the policy rate on its own and conclude that nothing has changed. The rate can stay exactly where it is while the market becomes much less concerned about what comes next.
There’s also the earnings side of this. AI spending is still working its way through the economy, and I think that gives the market something substantial to work with. If businesses continue growing their earnings while the pressure for higher rates eases, that’s a combination I’m constructive on.
My view going into September is that the Fed has less need to hike if this direction in the data continues. Of course, the decision is up to the committee on the day, and there is more data to come before then.
I’ll change that view if the evidence changes. For now, I think the inflation picture is becoming more supportive. A market that was worried about another round of tightening can get some relief from that, even without a rate cut.
