Point of View: The Federal Reserve Has Over-Eased, with a 65% Chance of Stagflation in the United States

Fed Governor Waller shifted from potentially supporting interest rate hikes to adopting a dovish stance after his remarks. The labor market is in good shape, and he expects the August jobs report to sustain this trend. Three-month core inflation has shown "significant improvement" at an "encouraging pace". Headline and core PCE are not the best indicators for judging inflation trends. Pending revisions by the U.S. Commerce Department to estimates of non-market prices could lower the 12-month PCE by a few tenths of a percentage point. Waller noted that the next interest rate decision will "largely depend" on the August inflation data set to be released next week. "If we continue to make progress toward the 2% target, I am willing to support keeping the policy rate at its current level. But if inflation data comes in higher than expected, I will consider a rate hike. An acceleration in inflation may not prompt me to support policy tightening. If there is evidence in August that the momentum of inflation moving toward the 2% target has reversed, a small adjustment to our policy stance will help ensure inflation returns to target."

Markets have scaled back bets on Federal Reserve interest rate hikes, as Fed Governor Waller earlier stated that inflation has shown signs of improvement. According to CME Group’s FedWatch tool, the current probability of a Fed rate hike in September is 60.4%, with the next FOMC meeting scheduled for September 26.

US initial jobless claims for the week ending August 29 stood at 206,000, the highest since the week of August 15, against a market expectation of 205,000.

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Federal Reserve Governor Waller: If August inflation data continues the recent positive trend, he will support keeping the policy rate unchanged. If August inflation data comes in strong, he will consider backing a rate hike in September. A significant acceleration in inflation may not be necessary to justify a tighter policy stance.

According to Bitget's market data, after U.S. initial jobless claims came in slightly above expectations, spot gold rallied nearly $20 in the short term to $4,466 per ounce, while spot silver gained 1.5% on the day, hitting $66.3 per ounce.