Everything has changed for the Fed

Everything has changed since Jackson Hole.

During her speech at the annual event, Fed Chair Janet Yellen noted the “continued solid performance of the labour market and our outlook for economic activity and inflation” AND made the case for an increase to the fed funds rate. Additionally, Fed Vice Chairman Stanley Fischer said the “big numbers” have been better than they have been in quite some time.

The hawkish rhetoric at Jackson Hole had many on Wall Street talking about the possibility of a Fed rate hike coming as early as September. In a note sent out to clients ahead of the August jobs report, Renaissance Macro’s Neil Dutta wrote, “If the August figure resembles the last two months, the Fed goes this month.”

And that seemed to be what the market was thinking as well. On the Monday following Yellen’s Jackson Hole speech, fed fund futures data compiled by Bloomberg showed the market was pricing in a 42% chance of a September rate hike, and a 64.7% probability that at least one rate hike would occur before the end of the year.

But that was then.

A disappointing August jobs report was followed by the weakest growth in the US service sector in six years. And all of a sudden the chance of a September rate hike is down to 22% and a Fed rate hike was seen as no better than a coin flip.

It’s not just the fed funds futures market that is taking note.

Not only has the US Dollar Index given up virtually all of its post-Jackson Hole gains

But the US 10-year yield is now below where it was before Yellen’s speech.

Even Goldman Sachs has pushed back its call for a September rate hike. The investment bank now thinks there is only a 40% chance the Fed raises rates at its September meeting, down from 55% following Friday’s jobs report. As for the rest of the year, the firm sees a 70% chance of at least one rate hike, down from 80% just a few days ago.

And these lowered expectations come despite the US economy coming close to meeting both conditions of the Fed’s dual mandate. The labour market is extremely tight right now as the unemployment rate sits at 4.9% and wages are rising at a 2.4% year-over-year clip, just off a post-crisis high.

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