MARKET CALL: Stocks Discounting Fed Put

Ever since the release of the weaker-than-expected July employment report at the start of this month, stock investors have been betting that the Fed Put is back in play and that it will probably be implemented at the FOMC's meeting on September 16-17. Fed Chair Jerome Powell had been pushing back against this notion since early this year by saying that the Fed is in no rush to lower interest rates. However, he didn't do so in his Jackson Hole speech on Friday. Instead, he said, "Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance." In other words, the FOMC might cut the federal funds rate at the September meeting. As a result, stock prices soared on Friday (chart).

Powell didn't mention that between now and the next FOMC meeting, a few indicators, including August's CPI and employment reports, might convince the FOMC to hold off on easing if they are hotter than expected, as we think likely. That's still our base-case scenario.