Inflation and Interest Rates: What the Fed May Do Next
Market Commentary
Inflation and Interest Rates Move Back Into Focus After Jackson Hole
Inflation and interest rates are back in focus as markets weigh more hawkish Federal Reserve commentary, higher Treasury yields, and the next major labor-market data point.
At the time of recording, the 10-year Treasury yield had touched approximately 4.76%, its highest level since October 2023. The S&P 500 was near 7,675 and up about 12% year to date, although equities were selling off modestly as interest rates moved higher.
A key driver is the market’s interpretation of Fed Chair Warsh’s Jackson Hole remarks. Rick Wedell, CIO of RFG Advisory, explains that Warsh reaffirmed the Federal Reserve’s 2% inflation target and emphasized short-term interest rates as an important policy tool for bringing inflation toward that goal.
Warsh also characterized the labor market as relatively healthy, according to Rick. Taken together with hawkish commentary from other Federal Reserve officials, those remarks pushed the market-implied probability of a September rate hike to about 60% at the time of recording. Rick noted that markets were also assigning roughly a 50/50 chance to another rate hike before year-end.
Higher rate expectations are already being reflected in Treasury yields and equity-market behavior.
Rick notes that when interest rates move higher, equity markets generally do not welcome the change. Stocks were selling off modestly at the time of the recording as investors adjusted to the possibility of tighter Federal Reserve policy.
Inflation risks are also tied to renewed U.S.-Iran tensions in the Strait of Hormuz. Rick explains that another exchange of strikes could place additional upward pressure on prices, which could make the inflation backdrop more difficult for a Federal Reserve focused on returning inflation to 2%.
The next major data point Rick is watching is the unemployment report due at the end of the week. He describes the labor market as a low-hire, low-fire environment, with unemployment expected to remain around the low-4% range.
If the labor market continues to look relatively stable, Rick says markets could view that as giving the Federal Reserve more room to consider a September rate hike. The unemployment report will therefore be an important input as investors assess where inflation and interest rates may go next.
Key Takeaways on Inflation and Interest Rates
The 10-year Treasury yield reached approximately 4.76% at the time of recording, its highest level since October 2023
Fed Chair Warsh reaffirmed the Federal Reserve’s 2% inflation target and emphasized short-term interest rates as a policy tool
Market expectations for a September rate hike rose to about 60% following more hawkish Federal Reserve commentary
Renewed U.S.-Iran tensions in the Strait of Hormuz could add upward pressure to prices and inflation
The upcoming unemployment report may influence how much room markets believe the Federal Reserve has to raise rates
Inflation, Treasury yields, Federal Reserve policy, geopolitical tensions, and labor-market data remain key factors to watch
Watch the latest Market Commentary with Rick Wedell for more perspective on inflation and interest rates and what the Federal Reserve may do next.
Inflation and Interest Rates: What the Fed May Do Next
Inflation and Interest Rates Move Back Into Focus After Jackson Hole
Inflation and interest rates are back in focus as markets weigh more hawkish Federal Reserve commentary, higher Treasury yields, and the next major labor-market data point.
At the time of recording, the 10-year Treasury yield had touched approximately 4.76%, its highest level since October 2023. The S&P 500 was near 7,675 and up about 12% year to date, although equities were selling off modestly as interest rates moved higher.
A key driver is the market’s interpretation of Fed Chair Warsh’s Jackson Hole remarks. Rick Wedell, CIO of RFG Advisory, explains that Warsh reaffirmed the Federal Reserve’s 2% inflation target and emphasized short-term interest rates as an important policy tool for bringing inflation toward that goal.
Warsh also characterized the labor market as relatively healthy, according to Rick. Taken together with hawkish commentary from other Federal Reserve officials, those remarks pushed the market-implied probability of a September rate hike to about 60% at the time of recording. Rick noted that markets were also assigning roughly a 50/50 chance to another rate hike before year-end.
Higher rate expectations are already being reflected in Treasury yields and equity-market behavior.
Rick notes that when interest rates move higher, equity markets generally do not welcome the change. Stocks were selling off modestly at the time of the recording as investors adjusted to the possibility of tighter Federal Reserve policy.
Inflation risks are also tied to renewed U.S.-Iran tensions in the Strait of Hormuz. Rick explains that another exchange of strikes could place additional upward pressure on prices, which could make the inflation backdrop more difficult for a Federal Reserve focused on returning inflation to 2%.
The next major data point Rick is watching is the unemployment report due at the end of the week. He describes the labor market as a low-hire, low-fire environment, with unemployment expected to remain around the low-4% range.
If the labor market continues to look relatively stable, Rick says markets could view that as giving the Federal Reserve more room to consider a September rate hike. The unemployment report will therefore be an important input as investors assess where inflation and interest rates may go next.
Key Takeaways on Inflation and Interest Rates
Watch the latest Market Commentary with Rick Wedell for more perspective on inflation and interest rates and what the Federal Reserve may do next.