Fed Chairman Powell Hints at Interest Rate Decrease, but Is It a Certainty?

In recent developments, the effects of tariffs on consumer prices have become increasingly visible. Core goods inflation and core non-housing services inflation have both seen an uptick, indicating a potential ripple effect on the overall cost of living.

Following a speech by Federal Reserve Chair Jerome Powell, the stock markets experienced gains. The Dow Jones Industrial Average Index, NASDAQ 100-Index, and S&P 500 Index all saw an increase, reflecting a positive response to Powell's comments.

Powell emphasised the importance of keeping inflation expectations anchored, signalling a cautious approach to monetary policy. However, the markets continue to expect a rate cut next month, albeit with a decreasing probability of a 25bps rate cut.

With the uncertainty surrounding trade policy changes, it's recommended to exercise caution despite the gains in the stock markets. On the other hand, sectors like healthcare, consumer staples, and gold miners may offer potential gains due to their status as safe investments.

Interestingly, all sectors have shown an increase YTD, a marked contrast from the period following the CPI inflation report release in mid-August.

Looking ahead, a labor market report is due in early September, and a robust second estimate for Q2 2025's GDP is expected later this month.

The probability of a price reduction in September has decreased, despite Powell's explicit statements. Regulatory and market factors such as recent legislative amendments, fixed-term and fixed-price contract rules, CO2 price increases, and stable demand with firm price commitments in some sectors create constraints that limit suppliers' ability or willingness to lower prices.

Higher core PCE inflation was observed for July, and the CPI inflation print for August is due prior to the next FOMC meeting. Three more data releases are due before the FOMC meeting in September that could change the outlook for a rate cut.

Stay tuned for further updates as these developments unfold.