The Fed Can Stay Patient
The latest jobs report did not change the story, but it lets the Fed keep waiting and watching how new data comes in. That has been the right read for several weeks: the Fed can stay in wait-and-see mode. The June inflation reports gave the Fed room to breathe and were likely the main reason rates held steady at last month's meeting. Last week's jobs report brought another sigh of relief. One report, on inflation or jobs, does not make a trend, but it buys time.
A weak jobs report changes the math. With inflation above target for more than five years and a strong or stable job market, it would be hard to justify sitting still and not hiking. But if the labor market softens, the picture shifts. Officials weighing a move from "hold" to "hike" now have to ask what damage a hike could do while the job market is weakening.
Inflation Is the Report That Matters This Week
This week's inflation data could actually move the needle if the number runs hot. For the next few months, upside surprises on either inflation or jobs could push markets to price in Fed rate hikes again.
The key figure to watch is the monthly rise in core inflation. Core CPI is expected to rise 0.2% this week. New Fed chair Kevin Walsh is not giving clear forward guidance, but other committee members are. New York Fed President John Williams has laid out his path and wants to see monthly core inflation of 0.2% or less to feel sure the drop in inflation is back on track. A 0.2% or lower reading would please Williams and likely other members too.
A hot reading would change things. Inflation has been above target for over five years, and the Fed can't get complacent. If this week's number comes in hot, the odds of a rate hike later this year go up. A hot inflation print would outweigh a weaker jobs report, exactly because inflation has been running above target for so long.
Walsh, Credibility, and Jackson Hole
Susan Hammock speaks today, notable because she dissented at the last meeting. Given Walsh's lack of forward guidance, his Jackson Hole speech will be closely watched. Leaks last week from people close to him said he admits he may have made mistakes in how he communicated policy. The hope is that he offers at least some view of monetary policy: Is it restrictive, accommodative, or at neutral? What indicators is he watching to decide whether the Fed funds rate needs to change? Not forward guidance, just a sense of his thinking.
On the talk that the Fed has lost credibility, I don't think it has, not yet. It's still early. Walsh has chaired only two meetings, and you can argue they got it right: soft June inflation let them hold rates steady in July. But if data later points to a needed hike and he keeps quiet, giving no insight and no support for the case, then it becomes a real credibility problem. Two meetings in, it's too soon for that.
Treasury Auctions Are a Demand Test
The 10-year and 30-year Treasury auctions this week matter, even if they don't grab headlines. These are the long-dated notes markets watch. Treasury Secretary Bessent and others seem worried about what's happening at the long end, partly because of talk over their role in the yen intervention.
Yields are high compared with the last 15 years. The 30-year yield keeps testing its highest levels since 2008. The 10-year yield is bouncing around just under 4.75%. Those yields look attractive. But weak demand or auctions that miss expectations would be a warning sign, showing investors are worried about fiscal problems, uncertain inflation, or simply demanding higher yields to lend to the US government. That is the real risk, not just short term but for years ahead. The country keeps running deficits and funds them by issuing Treasuries, so it has to sell more every year and keep finding that next buyer. These auctions show what demand looks like at home and abroad. Weak demand would mean current yields aren't high enough to draw in buyers, a sign of growing worry about the country's fiscal path.
