BREAKING: The FED Just Flipped – Money Printing Is BACK!

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DECLINING JOBS / RISING UNEMPLOYMENT:
A few weeks ago, expectations were for 300,000 new jobs. Instead, we got a major revision: the real number was just 73,000. The reason? Jobs data initially comes from surveys and limited firm-level responses. Later, as more information comes in, those numbers get revised. Normally, revisions are expected, but this time the adjustment was massive. Low response rates, pandemic-driven data gaps, and seasonal adjustments all contributed to the error, leaving markets blindsided. While critics like Trump call the numbers “rigged,” the truth is revisions are normal, though this one revealed a much weaker labor market than anyone expected.

THE FED PIVOT:
Jerome Powell, the Fed Chair, usually avoids surprises. The central bank prefers to signal its intentions early so markets have time to prepare. Recently, he gave the strongest indication yet that rate cuts may be on the horizon. He warned of “downside risks” to employment, meaning layoffs could rise sharply. This was a major shift from only weeks earlier when the Fed strongly resisted cuts, even as Trump demanded aggressive easing. Powell stressed that the Fed remains independent of politics and decisions will be based solely on economic data. Still, rate policy is determined by a vote among 12 members (not Powell alone) so the upcoming meeting will be critical.

AVERAGE INFLATION TARGETING:
Perhaps the most important revelation was Powell’s shift in strategy around inflation. Historically, the Fed aimed for 2% inflation, a number largely chosen without strong economic justification. After 2020, they briefly experimented with a “makeup” strategy, allowing inflation to run higher to offset years when it was too low. That experiment failed as inflation soared to 7%. Now, Powell has introduced a new approach: flexible average inflation targeting. Under this system, the Fed will still aim for 2%, but they won’t panic if inflation runs slightly above or below in a given year. This flexibility could normalize inflation above 2% without forcing rates to stay high.

THE CASE FOR CUTTING RATES:

1. Weakening Jobs Market – Only 78,000 jobs were added in July, a sign the labor market may be faltering.

2. Debt Savings. Trump argues lower rates would save the government nearly $1 trillion per year in interest payments.

3. Stabilized Inflation. Inflation has hovered under 3% for the past year, suggesting it’s already under control.

THE CASE AGAINST RATE CUTS:

1. Wholesale Inflation Rising. Producer prices jumped 0.9%, suggesting higher consumer prices ahead.

2. CPI Uptick. Inflation rose 0.2% month-over-month, which could exceed the Fed’s flexible target if sustained.

3. Strong Labor Market. Unemployment remains near historic lows at 4.2%, not signaling a crisis.

4. Tariff Uncertainty. Ongoing trade disputes risk fueling inflation, making premature cuts risky.

WHAT HAPPENS NEXT:
Markets are now pricing in an 87% chance of a rate cut on September 17th. If it happens, borrowing costs will fall, asset prices may climb, and the political spotlight on the Fed will intensify. But with inflationary pressures still lurking, the decision is far from settled. Whether the Fed holds firm or pivots could define the economy for years to come.

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