In our view, the current economic backdrop is one of below-trend growth but not yet showing signs of an outright contraction that would force the Fed to act. Following Friday’s job data, fed funds futures shot up to over a 90% probability of a rate cut in September. In Cumberland’s view, this is a level of conviction that is overly confident. While we don't rule out easing, we place the odds closer to a coin-flip based on our expectations for upcoming inflation prints which would move trend inflation farther away from the 2% goal. Further, labor markets have shown periods of occasional volatility while ultimately proving resilient. Advisors should prepare for a possible scenario in which the Fed delays cutting longer than markets currently anticipate, especially if the next few data points don't deliver clear justification for action.
We believe both tariff-driven price pressure on goods and sticky service-sector inflation are likely to show up in upcoming CPI, PPI, and PCE prints — moving trend inflation modestly higher. These may not represent a structural long-term inflation problem or cause for alarm, but will eliminate the tailwind for the Fed to ease. Conversely, if the next employment report shows continued follow-through of significant weakness, the extremely high probability of a September cut will then be appropriately justified. It is important to reiterate that the Fed has been clearly emphasizing a data-dependent, meeting-by-meeting approach. There is much more data between now and September’s FOMC meeting, and it will matter.
We acknowledge the labor market is gradually softening, manufacturing is weakening, and consumer delinquencies are increasing, but we still contend the weakness is not yet moving at a concerning rate, with the larger service sector continuing to expand modestly. Weekly jobless claims are stable, broader unemployment remains low, and consumers are still in a stable position. While many firms appear to be slowing hiring they are not actively cutting their workforce, reflecting a preference to hold labor after the post-pandemic’s rehiring challenges. The desire to maintain labor versus cutting it is a dynamic that may allow the unemployment rate to stay low longer than normal even in a weakening economy, complicating the Fed’s read of labor slack.
The Fed has shown a preference to wait for conclusive data, particularly when inflation progress is questionable. If we see modest upside surprises in the inflation reports before the next FOMC meeting, and jobs data continue to show growth (even if modest), there simply will not be enough justification for the Fed to act in September. In that case, we would expect short-end rates to remain anchored, while the intermediate and long end may drift modestly higher, back to recent levels, as the curve recalibrates easing expectations. If this does occur, it might be yet another opportunity to take advantage of higher rates. Cumberland still believes the Fed will ultimately win the inflation battle, slow the economy, and eventually ease monetary policy.
Will the Fed ultimately ease? Yes. Will it be in September? Accepting a 90% probability is far too confident. Portfolios should remain calibrated for rate path uncertainty. Duration positioning and curve exposure continue to require close oversight. The Fed’s decision remains 100% data dependent.
August 12 & September 11: CPI
August 14 & September 10: PPI
August 29: PCE price index
Sept 5: Payrolls
Sept 17: Fed Rate Decision
David W. Berson, Ph.D., CBE
Chief Economist
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Benjamin C. Pease
EVP & Managing Director of Asset Management | Chief Innovation Officer
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