Redfin Economists’ Weekly Take: Markets Bet on September Rate Cut Ahead of Powell’s Jackson Hole Speech

Last Week In A Nutshell

• Mortgage rates fell and markets got excited last week after a fairly benign CPI report drove expectations of rate cuts from the Fed, perhaps even outsized ones. Fed speakers, the PPI report, and retail sales all rained on that parade, however, suggesting no need for a cut larger than 25 bps in September—and even that is not totally written in stone.

This Week’s Attractions

• Fed:
• • Speeches from Governor Bowman (Tuesday) and Waller (Wednesday); FOMC Minutes (Wednesday): Both Bowman and Waller dissented against the last Fed decision in favor of more cutting.
  • Jackson Hole speech (Friday): This is the main event of the week where the question will be whether Chair Powell sets the stage for a September 17 rate cut. Since a cut is largely priced in, the Fed pushing back against a rate cut would cause mortgage rates to increase.

• Housing data:
  • NAHB Housing Market Index (Monday): Ticked down to 32 from 33 last month against expectations of a small increase.
  • Building Permits, Housing Starts (Tuesday): Both are expected to decline slightly.
  • NAR Existing Home Sales (Thursday): Consensus expects this to fall slightly from June, but Redfin sees a small uptick possible from June’s lower-than-expected number.

Last Week’s Highlights

• CPI: Core CPI came in largely as expected, clearing a hurdle for the Fed to resume cutting rates. While tariffs clearly nudged some categories up, others that should be affected by tariffs showed no impact. Relieved traders piled into bets that the Fed will cut on September 17, with some wagering on an outsized cut.
• Bessent interview: Treasury Secretary Bessent used an appearance on Bloomberg to pour gasoline on the fire, calling for rates to be 150 bps lower and causing traders to pour even more money into bets for a 50 bps cut.
• PPI: The Producer Price Index (the second, much smaller and much noisier piece of the inflation puzzle) came in like a wet blanket, much higher than expected. CPI and PPI together imply that core PCE (the Fed’s preferred gauge for inflation) will come in around 0.3% month over month and 2.9% year over year for July, a small increase from June.
• Retail Sales: Core retail sales came in a little higher than expected with upward revisions for prior months, indicating continued strong spending from consumers.

Diving a Little Deeper

• Inflation: The million dollar question is: why isn’t there more inflation four months after Liberation Day? So far, the data suggests that the answer is fairly nuanced.
  • The CPI data shows that some of the expected inflation is, in fact, showing up in consumer prices.
  • But U.S. companies seem to be absorbing the lion’s share (64% as estimated by Goldman Sachs) of the tariff burden. While some have indicated that they will eventually pass it on, it’s far from certain when and if that will happen. Some companies—whose margins increased post-pandemic—may choose to never pass them on in hopes of gaining market share, but not all have that luxury.
  • It also appears that there’s actually less to pass on. Effective tariff rates haven’t been as high as one would expect given the announced tariffs rates. Barclays estimates that less than half of imports have been subject to tariffs due to various exemptions. There are also various frictions that seem to be delaying the actual implementation of the announced tariffs. In addition, companies may be pivoting away from importing from countries with higher tariffs, such as China.
• Jackson Hole: Should we expect Chair Powell to use his Friday speech to make the clear case for a rate cut at their next meeting? Probably not. He will likely highlight the risk of labor market weakness and leave a cut as a possibility, but he will want to leave himself maximum wiggle room. There is a whole round of data coming between now and the September 17 meeting, with one more jobs report (September 5) and one more PPI/CPI combo (September 10/11). While circumstances are not exactly the same, the Fed vividly remembers the events of last August when a shockingly weak jobs report in early August, just days after the July Fed meeting, made the Fed look “too slow.” It brought on a dovish Jackson Hole speech followed by a 50 bps “catchup” cut at the September meeting. Subsequent jobs reports came in stronger, making the September cut look a little too large in hindsight. Notably the unemployment rate is currently at the same level (4.2%) as a year ago. But the Fed’s job is actually harder this time around. They are likely facing both a more significant threat of labor market weakness and rising inflation, both due to the tariffs making their way through the economy.

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