After the Federal Reserve's July meeting, investors quickly reached a consensus: The central bank was turning slightly dovish.
After embarking on an aggressive rate-hike spree this year in a bid to fight inflation, the Fed indicated it could downgrade the size of its hikes moving forward.
"We've been front-end loading these very large rate increases, and now we're getting closer to where we need to be," Fed Chair Jerome Powell told reporters.
Of course, Powell said, another "unusually large" increase could be on the table too. But Wall Street looked past that.
What came next: Investors cheered Powell's apparent pivot. The S&P 500 rallied, notching its best month since November 2020, and financial conditions eased. Mortgage rates fell below 5% for the first time since mid-April.
Now, Fed officials are trying to set the record straight. Not wanting markets to change course too sharply, reversing the effects of their hard work thus far, they've been talking tough again.
"[We're] nowhere near almost done," San Francisco Fed President Mary Daly said in an interview on LinkedIn last week.
Loretta Mester, head of the Federal Reserve Bank of Cleveland, told the Washington Post that it "would be inappropriate ... to cry victory too early" and risk letting high inflation become entrenched.
"We need to see really compelling evidence that inflation is moving down, and my view is that we haven't seen that yet," Mester said.
As the Fed tries to bring demand back down so it stops running up against limited supply — pushing up prices, it's closely watching the labor market, which has remained strong.
While openings fell in June, the US economy continues to add jobs at a healthy pace. A blowout July report, released on Friday, showed a gain of 528,000 positions last month. The unemployment rate ticked down to 3.5%.
The news poured cold water on the theory that the Fed would change its approach dramatically any time soon. The central bank actually wants to see some weakening in the job market. When there are too many open roles, wages rise quickly, which can make economy-wide inflation even worse.
"This isn't the news the Fed wanted to hear, and this will likely cause it to push rates higher, faster," said Robert Frick, corporate economist with Navy Federal Credit Union.
Investors have come back around: The stock market on Friday predicted a 66% chance of a three-quarter-point rate hike in September, according to CME's FedWatch tool. On Thursday, the market priced in just a 34% chance of a hike that high.
Coming up: The next big data release is the Consumer Price Index, which is used to track US inflation. Economists polled by Refinitiv expect to learn that prices rose 8.7% in the year to July, down slightly from June. But excluding volatile food and energy prices, inflation may have inched higher.
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