If it walks like a duck…
The Fed has a dual mandate – keep prices stable and employment high. Inflation (aka pricing pressure) has continuously fallen lower and lower below the Fed’s 2% target rate. Boosting inflation might be rationale for cutting rates in July. But the latest CPI report showed core inflation (a measure that strips out food and energy) jumped up 0.3% compared to the prior month, which is the largest increase in 18 months.
Moral of the story: Despite the 18-month-high increase in core CPI, annual prices only increased 2.1%, which is significantly lower than the ~3% number we were recording a year ago. While the Fed uses the PCE Index to measure pricing, CPI readings provide directional guidance for the metric, and currently, the index is providing support for the Fed doves calling for a rate hike.
…and quacks like a duck…
This week’s JOLTS report showed job openings decreased by 49k, driven by construction and transportation industries, while the hiring rate decreased by 0.2%, driven by the professional and business services industry. Unemployment increased 0.1% to 3.7% driven by more people entering the workforce, which is generally a sign of confidence in from the workforce as they are more optimistic about job prospects.
Moral of the story: This other piece of the Fed’s dual mandate – employment – continues to remain strong with unemployment remaining in record-low territory. However, the decline in job openings could be seen as a flag for slowing employment growth in the upcoming months. We’ve already seen some shaky employment reports this year, adding to the data supporting a pivot toward easing monetary policy.
…it’s a rate cut in July
Last month’s FOMC meeting left the market expecting an interest rate cut announcement at the July meeting. This week we saw meeting minutes from June that further support this expectation as many Fed officials said they’d be willing to cut rates if risks and uncertainties “continued to weigh on the economic outlook.” Also this week, Fed President Jerome Powell testified before Congress and his remarks were dovish – commenting on the risks weighing on the economy and confirming the Fed is ready to act as necessary to sustain the economic expansion.
Moral of the story: According to the minutes, several officials saw an interest rate cut as good risk-management to help cushion the effects of possible future adverse shocks to the economy while others viewed it as a way to boost inflation. Crazy to think how much the rhetoric has changed since the Fed raised interest rates in December. Stocks have rallied from the Fed’s comments this week and will certainly drop if the FOMC fails to cut rates as they have alluded to in the last few weeks.