Market Pulse: July 15, 2024

This is an argument in favor of the Fed lowering the funds rate at the July FOMC meeting. It is an argument full of ifs and buts and it is chock-a-block with caveats. It also assumes the possibility of a Powell pivot, but make no mistake, you know it as well as I, Powell pivots, that’s what he does.

The basis of this argument is the Unemployment Rate (UER). The UER, at 4.1%, is seven tenths off the cycle low. The low of 3.4% was last hit in April 2023. The distance already traveled is the important point. When the jobless rate moves up from a cycle low by six or seven tenths it does not stop there, but rather, the move higher tends to accelerate from that point forward.

If that pattern holds true in the months ahead, it is possible that the UER is up at 4.4% or even higher by the time the FOMC meets in mid-September; which is when the market figures the Fed will cut rates. If so, that means the UER would be at least one percent off its cycle low. That will not be a good look for the Fed, with the UER above their 4.2% longer-run projection, and them having done nothing with their key interest rate to counter the move. Furthermore, over the last half century, and more, the UER does not stop going up when it gets about one percent or so off the low, not for quite a while. Is Powell willing to roll the dice on this pattern not repeating itself? Or is it worthwhile initiating the easing cycle six weeks prior to the market’s expectation? What’s the harm?

Powell has said the Fed’s dual mandate is back in balance; risks on both the inflation and labor market sides of the ledger are once again equally weighted. Therefore, he adds, some unexpected trouble in the labor market would be reason enough to cut rates. Lately Powell mentions that a rate cut depends on the level of confidence that the Fed has in inflation falling to its target, just a bit more favorable data would do the trick is the implication. This seems to play against the balanced mandate story to some degree. But it can also be said that a weakening labor market could add to central bank confidence on inflation, or so the story could be told.

The July jobs report does not come out until two days after the next monetary policy session. So, for a rate cut in July, Powell would have to anticipate a repeat of the historical pattern in the UER, which is not the message he has been communicating, or the data that is released between now and the July 31 FOMC would have to be downbeat for the labor market specifically, and or the economy generally. For instance: • The weekly jobless claims data would have to continue weaken, maybe at a faster pace. • JOLTS has rolled over, Job Openings, Hires and Quits have all been falling for quite a while; the next reading of this comes out the day before the FOMC decision. • Q1 GDP disappointed at +1.4% and the first look at Q2 is set for July 25, it is forecast to be +1.7%; the Fed projected a 2024 growth rate of +2.1%. • Also, it wouldn’t hurt the Fed’s confidence level if the PCE Core annualized rate added to its streak of sixteen consecutive months of decline, from one month to the next; it is due out July 26.

Of course, there is a notable dichotomy within the labor market data. While there is the case to be made about weakness in the Household Survey, the one that delivers the UER, the jobless claims, JOLTS, etc. the shiny object amongst the tarnish is the Nonfarm Payrolls. Payrolls are averaging an increase of about 220k in the last six and 12 months; very solid results. This has, for the most part, muted any/most of the negativity about the labor data. But what if the Nonfarm Payroll data has not accurate in the last year or so? Well, for one thing, that would make for a stronger case for the Fed to respond to the labor market side of their mandate. Among other things, the Business Employment Dynamics (BED) report measures the net change in private sector payrolls on a quarterly basis. This report takes its time in doing the math, it is released seven months after the end of the quarter on which it is reporting…measure twice, cut once. In the first nine months of 2023 the BED showed private sector job gains of 1.116 million, which is more than one million less than the Nonfarm Payroll figure of 2.196 million. The Q3 2023 readings were -192k for the BED and +494k for the private nonfarm payrolls. The Q4 2023 reading of the BED is due out July 24, 9:00am CDT; it could be interesting if this report undercuts the payrolls once again. So, might be worth paying attention; maybe the Fed will be watching.

While it is true that the current UER is quite low on a historical basis, Powell has noted as much. It is also true that the Fed initiated has three easing cycles so far this century and the first rate cut of two of those cycles coincided with a sub-four percent UER. Another feature of the easing in the last couple of decades is that the first rate cut in all three periods was taken when the UER was two tenths, or less, above its low print. Regardless of the Fed’s timely action their rate cuts did not prevent the UER from rising significantly; so be it. What now?