Stock market anticipates a September rate reduction, yet faces two potential hurdles that could prevent it from materializing.

Stock market anticipates September interest rate reduction, however, two challenges loom that could potentially sabotage this plan.

Fed's September Meeting: Anticipation for Rate Cut Amidst Inflation Concerns and Job Market Uncertainty

The Federal Reserve (Fed) is gearing up for its September meeting, and the stock market is abuzz with speculation about a potential interest rate cut.

The Fed, tasked with maintaining stable prices and achieving maximum employment, finds itself in a challenging position as core inflation, which excludes volatile energy and food prices, has risen to 3.1% in July's report. This increase, coupled with the 2.7% year-over-year increase in the Consumer Price Index (CPI), has raised concerns about inflation and its potential impact on the economy.

The Fed's primary concern is to avoid a stagflationary scenario, a situation characterised by slow economic growth, high inflation, and high unemployment. The current economic climate, with its mix of job market uncertainty and rising inflation, reflects this challenge.

The economy added 73,000 jobs in July, but there have been significant downward revisions to previous job numbers. This fluctuation in employment figures has fuelled discussions about the health of the labor market, with the main case for a rate cut centred on protecting the labor market. If the labor market performs better than expected, there may be less need for a rate cut.

The Producer Price Index (PPI), a measure of the average change over time in the selling prices received by domestic producers for their output, rose 0.9% in July, marking the highest increase since 2022. This increase could indicate that companies are absorbing higher costs, potentially due to President Donald Trump's tariffs, which could eventually affect consumers.

The odds of a September rate cut have already declined since Powell's Jackson Hole speech. However, the market remains fidgety and ready to change its mind quickly. Investors need to pay close attention to the upcoming jobs report and CPI, as surprises in these data points could make it difficult for the Fed to justify a rate cut in September.

Two major economic data points will be released before the Fed's meeting: the August jobs report on Sept. 5 and the August CPI on Sept. 11. Daniel Lüchinger, the author of the important report on economic indicators, will speak with GKB experts in the Investment Outlook for GKB Anlage-Publikationen following these releases.

Long-term investors should be aware of potential volatility on the horizon. Understanding what's driving that volatility can help them stay calm and make more rational decisions. Investors are currently predicting at least five rate cuts between now and the end of 2026, but the Fed's decision in September could significantly alter these predictions.

The Fed has been dealing with high inflation for several years, and if inflation comes in hotter than expected, it's not supportive of a rate cut because rate cuts stimulate the economy, which could increase inflation and create long-term sentiment that prices will stay high.

The Fed's September meeting will take place from Sept. 16 to Sept. 17. The outcome of this meeting will undoubtedly have a significant impact on the economy and the stock market, making it a crucial event for investors to watch closely.