- Interest Futures remain cautious as markets price in a 69% chance of a September Fed rate cut.
- Weak labor market data reinforce calls for easing but limit expectations for an aggressive cutting cycle.
- Powell’s Jackson Hole speech is expected to guide near-term positioning
The US interest futures are trending with caution this week as investors attempt to reconcile slowing labor market statistics with the ongoing high inflation. Meanwhile, market participants await important cues from Federal Reserve Chair Jerome Powell at the Jackson Hole Symposium.
Products sensitive to the federal funds rate are still implying a high possibility of a 25 bps reduction in September, but expectations have cooled down in the past few weeks. The likelihood of a 25 bps rate cut in September is now 69% compared with about 90% earlier this month, according to CME’s FedWatch Tool. The move is based on sticky inflation prints and the dovish dissent of some Fed policymakers in the July meeting.
Labor market data has played a central role in repricing. The Nonfarm Payrolls advanced only by 73,000 in July, and the revisions over June and May took away over 250,000 jobs. Initial jobless claims have also been rising, indicating increasing slack. This has hardened the need to soften. But prices are firm, led by core CPI at 3.1% and producer prices rising to 3.6%. The continued nature of price pressures has limited the anticipation of a more vigorous rate cut.
The split in the Fed commentary has brought even more confusion to the picture. Governors Christopher Waller and Michelle Bowman have argued in the past month in favor of an earlier shift to rate cuts, citing crumbling growth and the non-recurring nature of the tariff-linked inflation. Officials like Kansas City Fed President Jeffrey Schmid and Cleveland Fed President Beth Hammack have cautioned that there is little change in inflation moving closer to 3% than 2%, showing that easing is not expected at an early stage.
The shape of the futures curve suggests the federal funds rate is expected to be near 3.75 to 4.00% at the end of 2025, which implies one or two rate cuts may be expected this year and followed by a slower pace. Markets have also priced in reduced chances of larger rate cuts than in the previous months in the summer as the Fed takes a more cautious stance.
Futures positioning is also being weighed down by geopolitics and trade tensions. The risk of a Russia-Ukraine war and tariff risks will limit the Fed’s flexibility, given the uncertainty over the inflation outlook. In the meantime, fiscal strains and increased political attention to the Fed are giving another twist to the equation as President Trump repeatedly demands steeper cuts.
