94.9% Chance of Interest Rate Cut in Sept – The Fed is in Trouble!

So I just want to give you a heads up that it is now widely expected that the Federal Reserve is going to cut interest rates in September. Okay, so what does this mean? This means that an easier monetary policy is on its way and more inflation. So I'm just trying to be honest. So this is, I mean, you can consider this a good thing if you already own assets, but from the cost of living perspective, it's just going to get worse. Cost of living is just going to get worse. Now, I want you to take a look at this. So this is wild. So this is coming from the CME FedWatch tool. There is now a 94.9% chance that the Federal Reserve will cut interest rates at their next meeting on September 17th. Okay, so how did this happen? Like, how did the probability just shoot up this high? Okay, so if you didn't know, it was clearly because of the jobs report that was released on August 1st, and that was a disaster of a report. So I want to tell you how this, you know, these results tie into the Federal Reserve and the expectation of a, you know, the major expectation of a rate cut for September. So this is what happened. In May, the government said that the labor market added 144,000 jobs, and that was revised down to 19,000. In June, the government said that the labor market added 147,000 jobs, and that was revised down to 14,000. And for July, the expectation was that the labor market would add 120,000 jobs, and it only added 73,000. And I'm just speaking honestly. Like, I wouldn't be surprised to see that get revised down from the 73,000 jobs added to even negative 120,000. Like, that's completely possible. Okay, so the situation was such a disaster that President Trump immediately fired the Bureau of Labor Statistics Commissioner that's in charge of overseeing these reports. Okay, now, President Trump has constantly been urging the Federal Reserve to cut interest rates. Like, that's no secret, right? But Jay Powell, who's the chair of the Federal Reserve, refuses to cut interest rates. So Powell's saying that if they start to cut interest rates too early, then that may re-accelerate inflation. So that's his biggest fear. So Powell's saying that we can afford to take a wait-and-see approach because the labor market is still solid. However, we got this jobs report, and it showed that the labor market is not solid, as a matter of fact. So essentially, that's what's going on. People are looking at this jobs report, and that's their interpretation. They're saying, well, maybe we cannot afford to take a wait-and-see approach anymore because these high interest rates, they're choking the economy, especially the labor markets. Okay, so here's how things have changed. Before the jobs report, there was a 41.3% chance that they're going to cut interest rates in September. Immediately after the awful results of the jobs report, which was released on August 1st, the odds of an interest rate cut in September jumped up from that 41.3% to 82.8%. So it almost doubled. And right now, the odds of a September rate cut, they've gone up even further, even higher to a 94.9% chance. So that is a very high expectation. Now, I just want to say, here's the problem. Because the Federal Reserve, they know that they have not won the war against inflation. So they've been trying to get inflation down to 2%, and their preferred measure of inflation is core PCE inflation. Right now, that's at 2.8%. And take a look at the chart. It's stalled there for more than a year. And another thing is that the tariffs are expected to accelerate the rate of inflation over the coming months. If you've been watching the Federal Reserve and the FOMC, you've heard Powell say that multiple times. So this is a problem. Okay, so it's a problem because if you have inflation running above targets and it's about to heat up, then those are reasons to not cut interest rates. But if you have a weakening labor market, then that's a reason to cut interest rates. So that's a tough spot. So what is the Federal Reserve going to do? Now, looking back at the FOMC, Powell was actually asked about what's it going to take for you to cut interest rates. And I want to show you how Powell responded. Hi, Chair Powell. Thank you. Well, can you give us a little more about what kind of economic data does the Fed need to see before you'll be ready to cut? I mean, do you need inflation back nearly to target? Are there other things in the pricing that you look for? Do you need to see weakening in the job market? What kind of things are you looking for? What will it take? It'll be the totality of the evidence. As I mentioned, there's quite a lot of data coming in before the next meeting. Will it be dispositive of that? It's really hard to say. We don't make those decisions right now. So we'll have to see. Well, I guess just in terms of inflation, though, for example, like some people would point to if it remains only in goods and it doesn't bleed over to services, then maybe that's evidence that the tariff effect is going to be a temporary one-time thing. Does that kind of thing affect your thinking, or do you just need to see the number come down closer to two? I think we'll look at everything. As I mentioned, a pretty reasonable base case is that this will be a one-time price increase. And in the end, we'll make sure that that's the case. We're just trying to do that efficiently. And efficiently means getting the timing right. So again, if we cut rates too soon, maybe we didn't finish the job with inflation. History is dotted with examples of that. If you cut too late, then maybe you're doing unnecessary damage to the labor market. So we're trying to get that timing right. And that's effectively what we're doing. OK, so the next Federal Reserve meeting is going to take place on September 17th. And Powell says that he's going to be looking at the totality of the evidence, or basically all the data. So he's still going to get another round of labor market data, the August report in September, and another round of PC inflation. But for the jobs, I don't think it's going to be a surprise to anyone to see that the labor market is going to weaken even further in the next report. OK, but let's think this through. So how can Powell justify an interest rate cut? If you have a weak labor market, which you want to cut, but high inflation, which you don't want to cut. I think the only way that Powell can play this off is if he says this high inflation is coming from the tariffs, but the tariffs are going to cause a one-time increase in inflation. It's not going to be an ongoing thing. I think that's the only way that Powell will be able to play this off and justify an interest rate cut. OK, but then you have people making the case that there's still the possibility that the Federal Reserve will not cut interest rates in September. So the reason is, well, their argument is because, yes, the jobs created, the quantity of jobs created, that's falling rapidly. There's no one denying that. But the unemployment rate, it ticked up by only 0.1%. It only ticked up to 4.2%. And Powell did say that the most important number to look at in the jobs report is going to be the unemployment rate. So please take a look. On labor, given the fluid labor supply situations, is there a number for this job report we get on Friday that would look to you like equilibrium job growth? You know, the main number you have to look at now is the unemployment rate, because it's true that the demand for workers in the form of, let's just say payroll jobs, that number has come down. But so has the breakeven number. Now, something else that I want you to keep in mind is that two Fed governors dissented at the last meeting. So essentially, the Fed committee decided to not cut interest rates, right? And then Fed Governor Waller and Vice Chair Michelle Bowman voted to cut interest rates. So last time the two Fed board governors dissented was more than three decades ago. So even within the Fed, there are calls to cut rates. So to be fair, these two governors were appointed by President Trump. But regardless, there was dissent. So from within the Fed, there is pressure to start cutting rates. Another thing that I want you to note is that this September meeting is going to be a really important one, because you have to remember that in September, they're going to update their forecasts. So last time in June, the Federal Reserve predicted two more interest rate cuts for the rest of this year. If they keep it at two rate cuts for the remainder of this year, that means that if they cut in September, then they're going to have to cut again very soon, either in October or in December. So I just want you to know that there is a big market expectation for the Federal Reserve to cut interest rates at their next meeting in September. So I'm going to keep you updated on this whole situation. Thank you for the support. Please subscribe, and I wish you a very nice day.