Fed chair Powell to speak Friday at Jackson Hole.
The Federal Reserve is in the spotlight this week, as investors anticipate the annual address by Fed chair Jerome Powell at the Jackson Hole Economic Symposium on Friday.
But on Wednesday, investors were tuned into another Fed-related event, the issuance of the minutes from the Federal Open Market Committee (FOMC) meeting on July 29 and 30. The minutes offer investors an opportunity to get more details on what the members are thinking, beyond their vote, the press statement, and the Powell press conference that follows.
The minutes revealed some interesting insights, mainly that the members were more concerned about one side of its dual mandate more than the other.
“The Fed meeting minutes clearly show why they didn’t cut rates at the last meeting – because the majority of officials thought the risk of higher inflation outweighed the risk of higher unemployment,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said. “But the far more important question is how they weigh the risks at the next meeting.”
Inflation was indeed expressed as a growing concern by some of the members, as the minutes detailed.
“Participants noted that tariff effects were becoming more apparent in the data, as indicated by recent increases in goods price inflation, while services price inflation had continued to slow,” read the minutes. The minutes also noted that a couple of participants said the tariff effects were masking the underlying trend of inflation. But tariff effects aside, inflation was close to target.
Inflation expected to increase
In the minutes, the FOMC members said they generally expected inflation to increase in the near term, fueled by tariffs. But the timing remained uncertain.
“Participants judged that considerable uncertainty remained about the timing, magnitude, and persistence of the effects of this year’s increase in tariffs. In terms of timing, many participants noted that it could take some time for the full effects of higher tariffs to be felt in consumer goods and services prices,” the minutes said.
They cited several contributing factors to this likely lag, including the stockpiling of inventories; slow pass-through of input cost increases into final goods and services prices; gradual updating of contract prices; maintenance of firm–customer relationships; issues related to tariff collection; and ongoing trade negotiations.
“As for the magnitude of tariff effects on prices, a few participants observed that evidence so far suggested that foreign exporters were paying at most a modest part of the increased tariffs, implying that domestic businesses and consumers were predominantly bearing the tariff costs. Several participants, drawing on information provided by business contacts or business surveys, expected that many companies would increasingly have to pass through tariff costs to end customers over time,” the minutes stated.
However, some members cited a mix of strategies that companies are pursuing to avoid fully passing on tariff costs to customers. These strategies include negotiating with or switching suppliers, changing production processes, lowering profit margins, exerting more wage discipline, or deploying cost-saving and efficiency measures.
“Inflation remains on the front burner for Fed officials as tariffs still pose a risk to the economy and a pickup in inflation,” Eric Teal, chief investment officer for Comerica Wealth Management, said. “The effective tariff rate on imports has risen to about 16% in August from 11% last month with the majority set to land on consumers.”
What it will take for the FOMC to lower rates
Fed Chair Powell could offer some clues as to what he is thinking at the Jackson Hole symposium. But it’s more likely that he will “keep his cards close to his vest,” Zaccarelli said.
Powell will likely emphasize that the Fed’s decision will be data-dependent, relying mainly on the upcoming jobs report on September 5, along with upcoming inflation reports on August 29, September 10, and September 11.
Zaccarelli said that unless there is another CPI or PPI disappointment, the rate cut decision will come down to whether the committee sees the unemployment risk as greater than the inflation risk.
“The labor market remains a wild card, but the high-frequency data has yet to substantiate the concerns created by the July jobs report,” said Comerica’s Teal.
In the minutes, the FOMC members seemed less concerned about the labor market, saying the unemployment rate remained low and that employment was at or near estimates of maximum employment.
But the July jobs report, which came out after the last FOMC meeting, showed that only 73,000 jobs were added to the economy last month, which was well below estimates of 115,000.
