Rate Cut Expectations vs. Inflation Reality: Jackson Hole Global Central Bank Meeting May Become Market Turning Point

Xinhua Finance, Beijing, August 18 – The remarks by Federal Reserve Chairman Jerome Powell at the global central bank annual meeting in Jackson Hole, Wyoming, from August 21 to 23, will be the core event affecting global capital markets this week. Currently, the gap between the market’s fervent expectations for a Fed rate cut in September and the complex reality faced by policymakers continues to widen, with a critical window opening for a battle of expectations over the direction of monetary policy.

Market Frenzy Bets on Rate Cuts, Valuation Bubbles Emerge

Recently, the S&P 500 has continued to climb and hit new historical highs, reflecting investors’ strong expectations for a Fed rate cut. Interest rate swap contracts show that the market currently sees a 92% probability of a rate cut at the September meeting, almost treating it as a foregone conclusion. This near-unanimous expectation stems from two motivations: first, July’s weak employment report and subsequent downward revisions have raised concerns about an economic slowdown; second, the market widely believes that as long as inflation does not experience a catastrophic surge, the Fed should implement a preventive rate cut to stabilize economic growth. Against this backdrop, funds have poured into high-risk assets such as stocks, cryptocurrencies, and corporate bonds, creating a liquidity-driven rally. However, this expectation-fueled market boom is notably fragile—if the Fed’s actual actions fall short of expectations, it could trigger a sharp “buy the rumor, sell the news” adjustment.

Sticky Services Inflation Highlights Policy Dilemma

Although the market is immersed in rate cut expectations, the latest economic data sends mixed signals. The year-on-year growth of core CPI in July unexpectedly accelerated to 3.1%, with services inflation being the main driver. Excluding energy, services prices rose 0.4% month-on-month, far exceeding the increase in tariff-affected goods prices. More notably, the final demand services price in the Producer Price Index (PPI) surged by 1.1%, indicating that future terminal inflation pressure cannot be ignored.

Morgan Stanley points out that services inflation is driven by endogenous factors such as domestic labor costs and rents, making it stickier and far harder to resolve than goods inflation, which is affected by external shocks. This phenomenon puts the Fed in a dilemma: if it insists on cutting rates, it may exacerbate inflation expectations; if it maintains high interest rates, it risks an economic slowdown.