Wolfe increasingly convinced Fed will start cutting interest rates in September

Wolfe Research analysts doubled down on their prediction of a Federal Reserve policy shift, citing recent comments from Chair Jerome Powell in his testimony to the Senate Banking Committee and economic data.

"Our main takeaway was that the Fed continues to shift focus within its dual mandate from inflation to employment," says Wolfe, referencing Powell's testimony.

During the testimony, Powell noted that "labor market conditions have cooled considerably compared to where they were two years ago," and the labor market appears to be fully back in balance. He added that this is no longer an overheated economy.

Wolfe Research says this suggests the Fed is growing confident inflation is on track for its 2% target, turning its attention to potential labor market weakness.

While acknowledging mixed signals from various employment surveys, Wolfe highlights July's payroll report as a tipping point.

"This past Friday's payroll report gives us increased conviction that the Fed will start cutting interest rates in September insofar as inflation continues to decelerate," the firm's note states.

Key upcoming inflation data points like CPI (July 11th), PPI (July 12th), and PCE Deflator (July 26th) will be crucial for the Fed's decision-making, according to Wolfe.