Recently, the market has been buzzing about the Federal Reserve's inevitable interest rate cut in September, with the probability said to be over 90%, but it’s likely that 99% of people are wrong. Now, large institutions on Wall Street are quietly retreating, while only retail investors are still frantically buying, leading to a huge divergence between the two sides. The key issue is that the latest inflation, employment data, and tariff impacts do not support an interest rate cut at all. Powell's speech at the global central bank annual meeting on Friday is likely to directly shatter the interest rate cut fantasy, halving the probability of a cut in September.
Why do we say the conditions for a rate cut are not met? Three hard reasons:
First, the core inflation rate in July was 3.1% year-on-year and 0.3% month-on-month, both accelerating. More troublesome is that the super core inflation surged by 0.55% month-on-month, which is the stubborn inflation that the Federal Reserve is most worried about, linked to wage increases. A rate cut would only make it worse.
Second, the tariffs imposed by the Biden administration on China have not fully passed through to prices, and in the coming months, commodity prices may suddenly spike. At this point, a rate cut would be like pouring gasoline on the inflation fire.
Third, the job market has not collapsed; the unemployment rate is still below 4%, and hourly wage growth is at 4.1%. There are even board members within the Federal Reserve opposing a rate cut, believing that employment is still strong and that a rate cut would stimulate inflation to rebound.
Powell's main message will definitely be to burst the interest rate cut expectations. He will emphasize letting the data speak, but the key data for August will only be released in September, so the probability of a rate cut in September will instantly drop. He will also warn of inflation risks, advising against being too optimistic, while simultaneously countering Trump to prove that the Federal Reserve is not politically influenced.
The market is now polarized: retail investors are betting wildly on a rate cut, while major Wall Street firms are retreating. Goldman Sachs even advises clients to hedge against the risk of no rate cut in September. Historical experience shows that when retail investors and institutions bet against each other, the institutions always win in the end.
What should ordinary people do now? First, be wary of the volatility risks of interest rate-sensitive assets; second, pay attention to the upcoming August inflation and employment data; most importantly, remain rational, don’t get carried away by market emotions, and stay alert now without blindly following the trend.
