Jackson Hole Changes the Fed Debate as Markets Head Into September

Last week ended with the Jackson Hole Symposium, where Kevin Warsh delivered his first address at the event as Federal Reserve Chair. As expected, markets were looking for some indication of how he currently views inflation and the next move in US interest rates, and the overall message was more hawkish than many had anticipated.

Warsh made it clear that the Fed still has work to do in bringing inflation sustainably back towards its 2% target. One of the more interesting points from the speech was his observation that around half of the goods and services within the PCE basket are still experiencing annualised price growth above 3%. That goes some way to explaining why he remains uncomfortable with the current inflation picture, despite the progress that has already been made.

The reaction in interest-rate markets was fairly significant. Expectations for a 25-basis-point increase at September’s FOMC meeting moved from around 35% before the speech to above 50% afterwards, while shorter-dated US Treasury yields moved higher. The Dollar also benefited, reversing some of the weakness we had seen heading into Jackson Hole.

Warsh also continued to push the idea of a “quieter Fed”, with less reliance on forward guidance and fewer attempts to steer markets towards a particular policy outcome in advance. If that is genuinely how the Fed operates under his leadership, economic releases are likely to become even more important because markets will have less guidance from policymakers between meetings.

That makes the timing of this week’s data particularly interesting. Jackson Hole has put the possibility of a September rate increase much more firmly on the table, but it has not settled the argument. My own view is that there still isn’t a convincing enough case for the Fed to hike, and I think that as we move towards the end of this year and into 2027, cuts are ultimately more likely than further increases. For now, though, with less forward guidance coming from the Fed, we have to be particularly careful about trading around individual data releases and interest-rate expectations.

As we leave the summer behind and move into September, the economic calendar starts to become considerably busier. This week is slightly shorter in the UK because of Monday’s bank holiday, but things get moving quickly from Tuesday with manufacturing PMI data from across Europe, the UK and the US.

We also get the latest flash Eurozone inflation estimate, which is expected to show inflation rising to around 3.2%. If we do see another move higher, it will inevitably add to the debate around whether the ECB may eventually have to respond with higher rates. It is worth remembering that this is still an initial estimate, but after everything we have seen with inflation this year, any upside surprise will be difficult for markets to ignore.

Wednesday brings the Bank of Canada’s latest interest-rate decision, with rates currently expected to remain unchanged at 2.25%. From an FX perspective, the more interesting part may be what the Bank says alongside the decision and whether there is any indication that its outlook has changed. We also have US ADP employment figures, with private payroll growth expected to improve slightly to around 47,000, followed by US factory orders.

Attention then shifts back towards business activity on Thursday with services PMI releases across Europe, the UK and US. As usual, the 50 level is important, with readings above it indicating expansion and anything below pointing towards contraction. Eurozone producer prices are also due and are expected to rise to around 1.3%, giving us another look at inflationary pressures further up the supply chain.

Friday is probably where things become most interesting. We have construction PMI data from Europe, followed by a speech from Bank of England Governor Andrew Bailey. With the September BoE decision approaching, markets will be listening closely for anything that gives us a better indication of how the Bank currently sees inflation and the path for UK interest rates.

Eurozone retail sales are also expected to improve by around 0.3%, before attention turns firmly to the US and Non-Farm Payrolls. Current expectations are for around 45,000 jobs to have been added, and after Warsh’s comments at Jackson Hole, I think this release carries even more weight than usual. A materially stronger labour market number would make it easier to argue that the US economy can withstand another rate increase. Another weak employment report would make the Fed’s decision considerably more difficult and could quickly take some of the recent strength back out of the Dollar.

Overall, it feels like we are heading into September with quite a few questions still unanswered. Jackson Hole has certainly made the prospect of another Fed hike more credible, but I’m not convinced the case is there yet, which makes Friday’s employment data particularly important. A strong NFP number would give Warsh’s argument more weight, while another disappointing report could quickly bring the conversation back towards whether the next meaningful move in US rates is actually lower.

In Europe, inflation and retail sales should give us a better idea of how much pressure the ECB is under, while Bailey’s comments will be worth watching as we get closer to the next Bank of England meeting. After a relatively quiet end to August, we are now entering a much busier period for central banks and economic data. If Warsh really does intend to give markets less guidance, the numbers themselves are going to have an even bigger say in where currencies go next.