Market Pulse: August 26, 2024

It is important to note that Fed Chair Powell’s opinion of the labor market deteriorated in the period between the July 31 FOMC press conference and his speech at Jackson Hole. As I see it, that matters for how he will incorporate upcoming data into his view on the pace of rate cuts.

Sure, a couple days after the July policy meeting the monthly report on employment was weaker than anticipated. The Unemployment Rate jumped a couple tenths higher, up to 4.3%, and payrolls fell short of expectations. But it’s more than that, Powell has also observed declines in job vacancies, hires and quits; and, he saw, along with the rest of us, a downward revision of 818k for nonfarm payrolls in the twelve months through March of this year. All of which led to him to exclaim at Jackson Hole that “the cooling in labor market conditions is unmistakable.”

In July the labor market was undergoing a “gradual normalization” said Powell at the presser. It was “strong, but not overheated.” The paradigm that Powell used as a comparison was pre-pandemic period; “I would say, again, I think you’re back to conditions that are close to 2019 conditions, and that was not an inflationary economy—broadly similar labor markets then.” So, said Powell, given that inflation remains more or less in line with expectations, growth continues reasonably strong and “the labor market remains, you know, with its current condition, then I would think that a rate cut could be on the table at the September meeting.” With those economic outcomes in mind, I think it can be assumed that the rate cut on the table would be for 25 basis points; no need for the Fed to be more aggressive at a time when things are going your way.

But things did not continue to go the Fed’s way in regards to the labor market. In the three weeks from the July FOMC press conference to Powell’s Jackson Hole speech the Fed Chair was no longer describing the labor market as “strong”. No longer was the period of five years ago a fair comparison to today’s labor market, “All told, labor market conditions are now less tight than just before the pandemic in 2019.” And, furthermore, it can be discerned from a passage in his speech that Powell sees the labor market as teetering on the edge, maybe not a bottomless abyss, but an unwelcome stumble at least. “We do not seek or welcome further cooling in labor market conditions.” It seems that a line has been drawn, and it is nigh.

“We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market,” said Powell at the KC Fed conference.

So, if the labor market conditions that existed at the end of July held steady, in addition to inflation and growth, that would have been enough to get the Fed to cut rates in September; the assumption being a quarter point reduction. But the labor market did not hold steady, the “cooling” of it has been “unmistakable.” Therefore, what does the step down in labor market conditions mean for Powell’s view of the pace of policy adjustment? Especially when he admits, “the downside risks to employment have increased.”

“The direction of travel is clear,” and the implication is also clear that the Fed is not in the one-and-done frame of mind; policy is restrictive and the labor market doesn’t need restrictive. Additionally, with labor market risks on the rise it is probably not a good idea for Powell to ignore the fact that there are two more employment reports in the period between the September and November FOMC meetings. A September policy move would not just be about the data already in the books, but the risks of data yet to come.

Powell will do “everything we can to support a strong labor market…” It seems to me that the burden of proof is on the August jobs data to be strong, well above forecast to keep the Fed from cutting fifty basis points in September. The step down in the labor market has already happened during the three-week period between the FOMC and Jackson Hole, and “downside risks to employment have increased.”

The August jobs data has enormous implications for Fed policy.