US Economy: Risk Assessment Ahead of Jackson Hole Meeting

■ The July FOMC minutes emphasized whether "upward inflation risks" or "downward employment risks" held greater sway. 

■ Within the Federal Reserve, opinions are divided, with the final stance hinging on employment data due on September 5 and CPI figures expected on September 11. 

    The minutes from the July 29-30 Federal Open Market Committee (FOMC) meeting, released on August 20, revealed that, given its dual mandates of "price stability" and "maximum employment," the Fed was focused on whether "upward inflation risks" or "downward employment risks" were more prominent. The FOMC was clearly divided on this matter. Most members viewed upward inflation risks as dominant, while several considered the risks balanced. Those dissenting from maintaining the status quo at the July meeting (likely Governor Waller and Vice Chairman Bowman) argued that downside employment risks were more significant. Data released after the July meeting showed notable downward revisions to payroll figures for May and June, indicating a cooling labor market more pronounced than expected. Coupled with subsequent remarks by some Fed officials, this suggests that more FOMC members might now be concerned about downside employment risks. 
 

    Conversely, rising inflation indicators and strong economic activity data may have caused some members concerned about inflation risks to adopt a cautious wait-and-see approach. In July, the Consumer Price Index (Core CPI: up 3.1% year-on-year, up 0.3% month-on-month) accelerated. While tariff hikes had a limited impact on commodity prices in specific sectors, service prices continued to increase further in July. The Producer Price Index (up 0.9% month-on-month) and the Import Price Index (up 0.4% month-on-month) also showed robust gains. The preliminary University of Michigan Consumer Sentiment Survey indicated that 10-year inflation expectations rose to 3.9%, a 0.5 percentage point increase from the previous month, reversing the downward trend seen since May. Additionally, July retail sales increased by 0.5% month-on-month, and the August manufacturing PMI (53.3, up 3.5 points from July) rose, signaling overall economic strength. These data points may persuade the Federal Reserve to remain cautious about rate cuts. Indeed, Chicago Fed President Goolsbee and Kansas City Fed President Schmid have both stated that conditions for a rate cut are not yet fulfilled. 

    With ongoing pressure from President Trump and Treasury Secretary Bessent for a September rate cut, market attention is focused on Fed Chair Powell's speech at the Jackson Hole symposium today. However, as previously discussed, opinions within the Fed remain divided regarding the likelihood of a September rate cut. Moreover, with employment data due on September 5 and CPI figures on September 11, before the FOMC meeting on September 17-18, it is unlikely Powell will confirm a rate cut in his speech.