The @federalreserve’s actions, language and overall tone today were very much like those of a #flight crew that has taken on precautionary #fuel to make sure the plane can arrive at a yet-to-be-determined destination without problems.
The fact is that there is great uncertainty regarding the progression of the #coronavirus#pandemic and the timing of a return to #economic normalcy and the #Fed has been diligently preparing for this.
More important than the public statements today were the discussions that took place around the #Fed’s boardroom table regarding the evolving #policy toolkit and potential implementation if things become worse for the #economy.
However, we may not learn about that until the #FOMC meeting #minutes are released three weeks from now.
Finally, the key to near-term #MonetaryPolicy will be all about the #Fed’s dual mandate, but with one side of the mandate being the primary target (#employment) and the other governing how far the central bank is willing to go (#inflation).
The fact is that the #Fed likely has an impressively long runway yet, as it could be a very long time before we regain full #employment, which didn’t even appear to be #inflation-accelerating at a 3.5% #unemployment rate.
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Last week’s jobs report continued a non-stop barrage of information-flow. Indeed, it seems as if there have been very few times in markets where one has had to interpret so much disparate, and at times conflicting, data relative to the economy and influences on it.
In a way, it does harken back to the days of pumping quarters into the Asteroids video game while trying to assimilate all the material coming at you at once.
The payroll report also comes with a load of footnotes attached to it, in terms of assessing what it really means for the state of current labor conditions. For instance, the reporting survey was conducted following a period of significant job displacement in California related to the wildfires and other adverse weather conditions around the U.S., in the midst of a changing immigration picture, more labor strikes, and the beginning of the impact of DOGE on federal government employment.
Over the past few days, we’ve received information that is likely to hold an impact on the market’s perception of the trajectory of interest rates, and will have broader market influences as well. The Consumer Price Index (or #CPI) is the most followed of #inflation measures (it gained a greater than expected 0.47% on a headline month-over-month basis and 3.0% year-over-year), and particularly Core CPI (which excludes volatile food and energy components), which increased strongly at 0.45% month-over-month and 3.29% year-over-year.
Yesterday’s CPI report, as always, was interesting in that there was a mix of strength in some areas and trend-developments in others. Both Core CPI and Core Services (ex-shelter) displayed significant gains, while the shelter category picked up by a smaller amount. Even within shelter, the much-followed Owners’ Equivalent Rent measure (or OER) was well behaved at 0.31% month-over-month, but lodging saw a big gain after having declined in the previous month.
As a result, to us the most critical element in the recent CPI reports has in fact been OER, and the trajectory of shelter inflation. That’s because both we and the market had been expecting that figure to trend lower.
The world continues to watch for a pathway to lower interest rates, but despite a modestly softer headline in nonfarm payrolls last week, of 143,000 jobs gained, underlying employment conditions continued to display a resilience that makes any @federalreserve rate cutting in the near- to intermediate-term appear unlikely.
Indeed, at 0.48% month-over-month and more than 4% year-over-year the wage growth looked solid, unemployment declined slightly to 4.0%, and prior month payroll revisions were 100,000 jobs greater than previously reported. So, all in all, the labor markets still appear to be in a good place.
In our view, for a Fed rate cut to be back on the table, we would need to see two, or so, consecutively softer employment reports, and that is for the central bank to even consider resuming its rate cutting cycle.
As we have argued in recent months, a great deal of progress has been made in combatting high levels of post-pandemic inflation. Still, the likelihood is that most of the meaningful progress is behind us at this stage, and inflation may remain sticky at levels higher than the @federalreserve would ideally like.
Indeed, yesterday’s headline CPI increased 0.39% month-over-month, greater than its gains from last month, largely due to energy price gains. That resulted in headline CPI rising to 2.89%, from 2.75% the month prior, on a year-over-year basis, amid unfavorable base effects.
The core CPI measure gained 0.23% month-over-month, and 3.24% year-over-year. Taking a step back to provide some context, the average annual rate of core CPI inflation from 2000 through 2023 was 2.37%, but for 2024 this measure resided at 3.24%, illustrating vividly why the #Fed wants to see further progress on #inflation.
What a way to kick off 2025!
Last Friday’s #JobsReport gave us more revealing data on the status of the jobs market in the U.S. at this stage, and it certainly continued to describe an economy in very healthy shape.
The evolution of hiring conditions is something that we are very focused upon, and we will continue to be so over the coming weeks and months. With a new Administration coming in, policies such as immigration reform, government hiring (or closures and layoffs), and incentives to spend more aggressively in places like in energy, will influence the ‘to and fro’ of job-demand in the country.
And furthermore, the @federalreserve has cited- almost as perquisite- that softness in labor conditions would have to be in place to continue to move the Fed Funds policy rate to lower levels, and we didn’t see a lot of motivation for in this data.
Yesterday’s @federalreserve move signals something of an ending to a story that has played out for several months now, in terms of the Fed’s rate cutting cycle, associated with what were significantly restrictive interest rates.
The #FOMC cut policy interest rates by a quarter-point, to the 4.25% to 4.50% range, and communicated more #hawkishly through the updated dot plot/Summary of Economic Projections (SEP), as well as during the Chair’s press conference. To us, this suggests that we’ve entered a new phase of the rate cutting cycle.
We have often argued that the more elevated Funds rate creates great pressure on lower income cohorts through the housing, credit card, and auto finance channels than is worthwhile at this stage, particularly given where inflation has decelerated to.