June’s jobs report sent a clear message to the Federal Reserve — the central bank risks falling behind the curve.
Job gains north of 200,000 last month satisfied a report that otherwise suggested the U.S. labor market was cooling quickly, as the jobless rate rose to its highest level since November 2021 and wage growth slowed. growing at the slowest annual rate since May 2021.
Neil Dutta, head of economics at Renaissance Macro, has become the leading voice on Wall Street arguing that the Fed should begin its rate-cutting cycle in September. In an email just minutes after Friday’s jobs report dropped, Dutta wrote, “[Friday’s] the employment report should bolster expectations for a September rate cut. Economic conditions are cooling and that makes tradeoffs different for the Fed.”
According to Dutta, the Fed’s July meeting should set the stage for a September rate cut.
Read more: What the Fed’s Rate Decision Means for Bank Accounts, CDs, Loans and Credit Cards
Forecasts from the Fed released on June 12 suggested that officials are expected to cut rates just once in 2024. However, a closer look at the so-called dot plot that summarizes these forecasts shows that the move in major markets for two cuts in 2024 does not must be a tall order.
In June, seven Fed officials expected one rate cut in 2024, but eight predicted two cuts. The difference makers? Four Fed officials who did not make any cuts this year.
Fed Chairman Jerome Powell has sought to downplay the importance of the dot plot over the past year as markets tried to pin the central bank on increasingly accurate forecasts. The absolute accuracy of the dot plot may remain murky, but the direction officials think politics MUST go is clear.
The move from March to June saw the need for three rate cuts go out the window.
But a host of Fed officials still see two cuts as the most likely outcome this year. The latest roundup of labor market data should provide plenty of fodder for officials in the dual camp to bring more colleagues to their side.
The recent rise in the unemployment rate also brings a possible trigger of the Sahm Rule, which has preceded each of the past nine US recessions.
The Sahm Rule indicates that the economy has entered a recession if the three-month average of the national unemployment rate has risen 0.5% or more from the previous 12-month low. After Friday’s jobs report, the unemployment rate rose 0.36% from its 12-month low over the past three months.
‘Immaculate disinflation’
Ahead of Friday’s June jobs report, data from CME Group showed investors were pricing in a 75% chance the Fed would cut rates in September. Those odds changed shortly after publication.
Writing in a note to clients on Friday, JPMorgan economist Michael Feroli said most details of the jobs report “were a little on the soft side.”
However, Feroli sees this report as describing a “gradual loosening of a very tight labor market [that] is consistent with the Fed’s immaculate disinflation narrative and should give the FOMC the confidence to cut rates sometime in the second half.”
Stocks on Friday had a somewhat muted response to the jobs data, but technology stocks led markets higher as the prospect of lower interest rates bolstered the outlook for high-growth names. Investors seem pleased, but not overjoyed, by the prospect of “unblemished disinflation.” And after all, the S&P 500 just gained 14.5% in the first six months of the year.
For investors closed on how economic data could shape the Fed’s path, next Thursday’s Consumer Price Index report will be the next catalyst.
And Friday’s jobs report also raises the possibility that we’re seeing labor market data overtake inflation readings as the main needle mover for the Fed.
Inflation, as Powell described it last week, is back on a “disinflationary path.” With the Fed’s own projections suggesting it doesn’t see inflation reaching its 2% target before the end of 2026, monthly volatility looks ripe.
Less tolerable, perhaps, is the current slack in the labor market. Last month, unemployment was projected to remain at 4% at the end of this year and at just 4.2% at the end of 2025. Therefore, a continued increase in the unemployment rate seems to have the teeth to create urgency at the Fed.
If Powell takes Dutta’s advice, the Fed chair’s press conference on July 31 will be a pivotal event for the central bank. Powell’s testimony before the House and Senate this Tuesday and Wednesday could also serve as a time to signal a change in thinking.
The annual Jackson Hole Symposium, held in late August, has often been used by Fed chairs to telegraph major policy changes over the years — though this year’s event may serve as less of an occasion for Powell to try a policy shift. , but rather as a time to cement a rate cut just weeks later.
Click here for the latest economic news and indicators to help inform your investment decisions
Read the latest financial and business news from Yahoo Finance