The Fed Is Cornered: What You Need to Know

**Michael Zuber** (0:00)
All righty, folks, I think it's time to have an honest discussion about Kevin Warsh's speech on Friday at Jackson Hole. Do you think he has trapped himself in a box? Has he used such strong language that he almost has to raise rates in September? Now, there are a couple of data points coming up that might give him a small off-ramp. But there was an article, I believe it was in the Wall Street Journal this morning that I read referencing former Fed presidents. And this line got me thinking. It's actually a line that I completely agree with. Basically, the gist of the line was, historically, the Fed has looked at data for a reason to hike.
These former Fed presidents, after listening to Kevin Warsh's speech on Friday, now believe the Fed is going to be looking at the data for a reason not to hike. That is a very, very different opinion. Now, there are two data points coming up that could be off-ramps. I think one is a nothing burger. Wow, what's going on with my voice?
Let's try that again. I believe one of the off-ramps is really a nothing burger, and that is going to be next week's jobs numbers. Again, first week of a new month, we get the Joltz Report on Tuesday, ADP Report on Wednesday, and then the big one, the BLS. We will talk about all of those in a minute. But it's hard for me to think that the jobs numbers this week will incent the Fed one way or the other. Why? Well, I think you heard pretty clearly, Kevin Warsh say things like, we are fixed and firm on 2% target. It's hard to believe that the market is restrictive, referencing lending. He talked about the job market basically being strong. So what could happen? The numbers could come in extremely strong, which again would warrant a rate increase. They could come in, blah, which they really have done. Or maybe they could come in horrible with a negative, I don't know, 100,000. Again, at this point, I think Kevin Warsh made it clear on Friday, it's not about the jobs market.
It's about inflation. So, the second off-ramp. We will get CPI and PPI the week, the following week. It will be before the Fed meetings. I think the only hope for those of you hoping for a pause is that CPI and PPI are significantly deflationary, not disinflation, deflation, meaning negative numbers.
Unfortunately, again, we've been talking about the base effect for a while. This is the worst month for the base effect. This is the month we have been pointing at for six months, saying inflation is going to look like it's increasing. What is going to roll off is a slightly negative number. So unless this month is more negative, inflation will be appearing to go up. It's just how math works. So if CPI and PPI go up month on month, they go up year on year from the previous readings.
I do not think Kevin Warsh has a choice. I think, frankly, it might be unanimous that we get our rate hike in September. Now, to be clear, I think a rate hike in October is no chance. There is absolutely no chance they do an October rate hike. I do think if the Fed had their way, they might wait in September and then do it in October. But that's simply not an option. Again, Kevin Warsh on Friday said something like, we have missed our goal for 58 months in a row. It is our job. That is our thing. And we have not done it for 58 months, or 54, or whatever it was.
So, lots of you, based on my comments, have not believed me that September will be a rate hike. I'm curious, have you changed your opinion? Are you going to give me any credit for calling it so early? We'll see. We'll see what that masses say. So, let's talk about the economic data next week. We do get a bunch. It's basically jobs, jobs, jobs. Starts on Tuesday with the Joltz report. We're going to be most interested in job openings. Job openings last month were 7.4, expected to be flat at 7.4 million. ADP report is coming in on Wednesday. Last month was reported at 44,000. That's private payrolls. It's expected to be up ever so slightly to 45,000. On Wednesday, we also get the Fed Beige Book. Again, the Fed Beige Book is basically the summary of the 18 districts. Thursday, we'll get weekly jobless report and a bunch of Fed speeches. I think they're all at some conference or something. So Thursday's Fed speeches could be market moving. We're going to find out just how many people are ready to raise rates. We know there are three. Heading into Jackson Hole, I think there was five based on my count. And we might be at seven or eight now. So again, a rate hike looking more and more likely. And then Friday, we get the big number, the BLS, the jobs number. Last month, don't forget, once again, disappointed at negative 23,000, expected to go up to 50,000, up 50,000 this time. And the unemployment rate is expected to stay at a remarkable 4.1%.