Fed Chair Jay Powell held his ground last month.
Minutes from the Fed's latest policy meeting show almost all officials backed the decision to hold rates steady, though to push for a cut even as the White House turned up the pressure.
Now the question is how tariff-driven import costs might fuel broader inflation, and some Fed officials want more data, and others say waiting too long could be a mistake.
Well, several big US retailers reported earnings this week, giving us a front row look at how consumers are.
Spreading across the country and how Trump's trade war is starting to hit the shelves.
Joining me on this Friday morning is Brian Jacobson, chief economist at Amex Wealth Management.
Good morning, Brian.
Thank you so much for joining me.
Well Powell is set to speak at 10 a.m.
Eastern time, so in less than 30 minutes, the Fed is walking a tightrope between politics, prices, and a still uncertain economy.
So in the battle between hawks versus does, what key words are on your radar this morning?
Yeah, thank you for having me.
It's a really exciting day with Chair Powell speaking in just a little bit.
I suspect that he's going to probably acknowledge that the labor market isn't quite as solid as what they had originally assumed.
We got those big revisions from the Bureau of Labor Statistics, so he'll probably say that information has suggested that the labor market is still strong but not as solid as they originally thought.
But yet at the, on the other hand, you have the full effects of inf. from tariffs not fully reflected yet.
So I think, you know, he is a trained lawyer and so he's probably going to talk out of both sides of his mouth, and I can say that because I'm also a lawyer, where it's on the one hand you have a solid labor market that's maybe showing some cracks, but yet inflation that they want to make sure is still under control.
So he's probably going to try to say as little as possible using as many words as he possibly can.
Yeah, and Brian, all of us have been keeping an eye on expectations for a 25 basis point rate cut next month.
And right now we are looking at the percentage hovering right above 70%.
But how should investors be rethinking timing expectations for a rate cut as we head into year end and also into 2026?
Yeah, I think that investors maybe want to be prepared for some surprises.
Currently the market is pricing in high likelihood of a cut at the September meeting, then again at the October, and then again at December.
But if we look back at previous times where the Fed has cut rates and then taken a little bit of a pause, the only times that they have continued.
The rate cuts as opposed to shifting to rate hikes.
We're back in just before the or during the global financial crisis, just before COVID, and then also the 2002 to 2004 period.
There in that period of time they were more fiddling with rates, trying to dial it in so they were cutting rates, took a pause, and then they did a 50 basis.
Point.
So I would not be surprised if we see the Fed actually do a 50 basis point cut in September and then take October off, see how things shake out, and then perhaps have the optionality to cut again in September.
So I'm actually bracing for a surprise as opposed to them just following the path of what the market is pricing in.
Well, speaking of surprises, 2025 has been a year of surprises, and we don't have a crystal ball, but this week we did get retail earnings.
So from shifting shopping habits to the impact of some of these new tariffs, the reports are revealing who's feeling the pinch, whether it's retailers, consumers, or books.
So what's your take on the nation's biggest retailer, as well as some of the other results that came out from those big box retailers this week?
Yeah, I think the big message here is that inflation from tariffs, it's a process, not an event.
Walmart, when they said about how there might be this creeping cost of tariffs beginning to show up at the consumer price level, I think that's actually a very good warning about how tariffs can work.
Initially, the retailers, they can, you know, stock up on inventory.
They can try to manage their costs, lean on their suppliers to make sure that the full effects aren't passed on.
On to consumers, but over time it does begin to creep into those consumer costs.
So now that we have a little bit more clarity on the tariff situation, I think that we will see those costs of goods sold begin to rise for businesses.
Consumers continue to be choosy.
And so as a result, it might mean that 3rd quarter earnings season, which right now we're getting out of 2nd quarter, that 3rd quarter earnings season could be a little bit more challenging than what the market is pricing in.
Yeah, and finally, Brian, before I let you go, looking ahead to the upcoming trading week, the final week of August, believe it or not, before that Labor Day holiday, we have some key economic data coming out, including PC at the end of the week.
We also get the first revision of GDP next Thursday alongside a durable goods orders.
So realistically, in terms of your forecasts, how important is the PC figure ahead of the August jobs report?
Well, I do think that the PCE number is important.
It's the Fed's official inflation gauge, but we have a pretty good idea of what it will say because we already have a lot of the component pieces from the consumer price index, producer price index.
The key thing is really the weighting of it.
I actually think that that PCE number is going to come in a little bit better that is lower than what the market.
Pricing in the CPI number, it showed an uptick in shelter costs that might not be reflected in the PCE data.
And so as a result, the fear around this rekindling of inflation from the CPI, perhaps that will be doused a little bit with that PCE number and then that should hopefully support that Fed rate cut in September.
OK, Brian, we will have to leave it there, less than 20 minutes to go until Jay Powell speaks, so I appreciate your time and thank you so much for sharing all of your insights.
Thank you.
