As Federal Reserve Chair Jerome Powell and the rest of the Federal Open Market Committee (FOMC) assemble this morning to start their two-day policy-setting meeting, there’s not much suspense priced into fed funds futures. As of this writing, the CME FedWatch tool is reflecting a 100% chance of a rate cut this week, with 96% odds for a 25 basis point cut to 4.00%-4.25%. 

Currently, there’s only a 4% chance priced in for a “jumbo” rate cut of 50 basis points, which would bring the benchmark range down to 3.75%-4.00% from the current 4.25%-4.50%. That means the Fed does have some room to surprise markets if they decide to ease more generously than expected.

Heading into this week’s meeting, the stakes for monetary policymakers are higher than usual. The July Fed meeting yielded a historically high number of dissenting votes when the majority opted to hold rates steady, and criticism of the central bank has ramped up in volume and intensity from the highest levels of the government.

And that’s just the background noise. From a data standpoint, inflation is still running hotter than the central bank’s unofficial 2% target, even while the jobs market has weakened considerably. Given the Fed’s dual mandate - to maintain price stability while fostering full employment - that leaves Jay Powell and his colleagues with a difficult economic environment to navigate as they consider the latest stats.

But perhaps our uneasy monetary policymakers, their shoulders preemptively bent under the weight of history’s judgment, can take some comfort in this notion from our own Senior Market Strategist Darin Newsom: “There is no such thing as actual economic data, because as South Park taught us 15 years ago, ‘The economy is just an idea made up by people thousands of years ago. The economy is not real.’”

For everything else you need to know ahead of this week’s Fed meeting, keep reading for more from three of our top market analysts.

Jim Van Meerten: What Data Will Drive the Fed?

Before we discuss what the Fed will do, we need to have a discussion about the conflict on interest rates between the White House and the Federal Reserve. Both think interest rates are very important, but they both have very different points of view.

The White House wants lower interest rates to help bring down the deficit. Each week, the Treasury has billions of dollars of bonds that mature. What makes the Treasury different is that it does not really retire the bonds; they are just rolled into new debt. (Some say when you pay off early investors with the money of current investors, that is the definition of a Ponzi scheme… but that is a discussion for another day!). The bonds that are maturing were issued at a lower rate than the new bonds issued, so the deficit increases. The White House wants lower interest rates to lower the debt carrying cost.

Separately, when interest rates are lowered, businesses tend to finance capital expenditures in the hopes of increasing profits, and will hire more people. Both of these decisions mean more corporate and personal income taxes are paid, thereby increasing revenue. In the White House's view, lower interest rates mean more revenue and less debt carrying expenses. Two for one!

On the other hand, the Federal Reserve feels it needs to control inflation, but not at the expense of increased unemployment – a very delicate balance. Higher interest rates put a brake on the economy, while lower interest rates accelerate the economy. In turn, this either heats up or cools off inflation. They are both looking at two sides of the same coin.

When the Fed makes a decision to raise, lower, or stand pat on interest rates, it takes about 6 months to a year for the economy to fully absorb its decision. In July, the annual inflation rate was 2.7%, but in August it was up to 2.9%. 

My prediction is that the data-driven Fed will increase interest rates if inflation is at or above 3%, will stay put if the inflation rate is between 2.5%-3% and lower interest rates when the inflation rate is below 2.5%. They will do this 25 basis points at a time.

Since the annual rate of inflation increased between July and August, if the Fed is as data-driven as they claim, they will stand pat and not cut rates this month, but will promise to evaluate the data again next month. My 2 cents.

– Jim Van Meerten is the author of Barchart’s Chart of the Day newsletter.

Darin Newsom: C’eci N’est Pas Une Economie

There is no such thing as actual economic data, because as South Park taught us 15 years ago,  ‘The economy is just an idea made up by people thousands of years ago. The economy is not real.’ Nor are the numbers made up by a variety of government agencies. 

The study of economics is also not real. Things are said and decisions are made based on political leanings having nothing to do with the ‘economy.’ I talk about this more in Sunday’s column on the Fed. 

The fed fund futures forward curve is indicating a 25-basis point cut this week, no change in October (though this could change), and a possible 50-basis point cut in December. But as markets tend to do, this forward curve can change.

Longer-term Treasury futures (10-year T-notes and 30-year T-bonds) are showing indecision, so I don’t see any need for long-term investors to change their existing hedge program. In fact, the Fed may be thinking that a small cut won’t change the situation enough to create a big economic shift, but will be enough to pacify the U.S. president.

I do think stagflation is a possibility. But does it matter? No. If the Fed moves into a series of rate cuts, weakening the U.S. dollar, stagnation becomes more likely. 

– Darin Newsom is Barchart’s Senior Market Analyst.

John Rowland: The More Things Change, The More They Stay The Same

It's been a month since the Jackson Hole summit, where Chairman Powell declared that "restrictive policy… could warrant adjustment." At that time, he was hinting that the Fed's focus was on the labor market and away from stable pricing. Most folks, including myself, were under the impression from the data we had been given that the labor market was fine; inflation was the concern. And yet, CME’s FedWatch puts a 100% chance for a rate cut in September.

One month later, it turns out Powell was right; the jobs market produced almost 1 million fewer jobs than expected in the past year, and the courts have decided to challenge the Trump administration's tariffs. Still, the market continues to price in a guaranteed cut for September, with increasing cuts and depths.

If we take a deeper dive into the labor market adjustments, we'll find that the job losses came from three distinct sectors and reasons: Government (DOGE); Manufacturing (immigration policy); and Business Services (productivity advancements and AI). Looking at the root causes, it’s likely that no amount of rate cuts will replace those jobs. Instead, the only thing it will accomplish is to weaken the dollar and raise prices for goods and services. 

So, we're back where I believe we were one month ago – a weakening economy with sticky inflation (aka, stagflation). 

From my trading perspective, it’s more of the same: tailwinds for the stock market and hard assets; pain and hardship for consumers; and increasing fiscal irresponsibility from our elected officials.

Stay hedged, and manage your risk! The good of all trading.

– John Rowland, CMT, is Barchart’s Senior Market Strategist and host of Market on Close.