Daniel DiMatino Booth, CEO and chief strategist at QI Research, speaks on “The Big Money Show” about how the Fed can get the U.S. economy back on track.
Attention on Federal Reserve Chairman Jerome Powell He is scheduled to deliver the keynote speech at the Central Banking Summer Symposium in Jackson Hole, Wyoming, on Friday.
In his speech, Chairman Powell is widely expected to give some hints about the timing of interest rate cuts and how the Fed sees the direction of the economy over the next 12 months.
“The key for us will be the tone from Chairman Powell, which we expect to lean dovish,” said Jack Janasiewicz, chief portfolio strategist at Natixis Investment Managers Solutions. “Simply put, inflation remains on track toward the 2% target and appears to be outpacing consensus. This, combined with signs of a weakening labor market, gives the impression that there is little need to maintain a hawkish tone.”
With inflation continuing to slow and unemployment rising, many investors believe the central bank will soon start slashing borrowing costs. The Labor Department reported last week that inflation rose 2.9% in July, the slowest rate of growth since March 2021.
Interest rate cuts are on the horizon, but mortgage rates may remain high
Still, policymakers may not be ready to declare victory just yet: Bank of America economists expect Powell to repeat his July message, in which he said a rate cut was possible in September if price pressures continue to ease.
The Marriner S. Eccles Federal Reserve Bank Building in Washington, DC, June 25, 2024. (Photographer: Ting Sheng/Bloomberg via Getty Images/Getty Images)
“The development of language in the July FOMC meeting will likely suggest that the Committee is ‘very close’ or ‘close’ to the point where easing is likely to be implemented,” Bank of America strategists wrote in a note. “A further signal will be whether Chairman Powell asserts more strongly that the Committee wants to avoid ‘unexpected weakness’ in the labor market, rather than simply reacting after it occurs.”
The Fed is scheduled to meet three times this year, in September, November and December. Investors widely expect the Fed to cut rates for the first time in September and approve at least one more cut this year, according to CME Group Inc.’s FedWatch tool, which tracks trades.
Policy makers will raise interest rates sharply in 2022 and 2023, Slow down the economy And then there’s inflation. Officials are now struggling with when to ease off the brakes. They entered 2024 planning to cut rates at least three times this year, but have repeatedly postponed those plans even as inflation eased in April, May and June.
U.S. payrolls slow to 114,000 in July, unemployment unexpectedly rises
When interest rates rise, they tend to push up interest rates on consumer and business loans, forcing employers to cut spending and slowing the economy. Rising rates have pushed the average interest rate on a 30-year mortgage above 8% last year for the first time in decades. The cost of all kinds of borrowing, including home equity loans, auto loans and credit cards, has also soared.
Federal Reserve Chairman Jerome Powell announced the bank’s decision to keep interest rates steady during a press conference in Washington on June 12, 2024. (Photo: Kevin Dietsch/Getty Images/Getty Images)
For months, rising interest rates seemed to have little effect on the labor market even as economists warned of a recession, but recent reports suggest that cracks are finally starting to show.
The July jobs report showed that payrolls increased by just 114,000 last month, while the unemployment rate unexpectedly rose to 4.3%.
U.S. payrolls slow to 114,000 in July, unemployment unexpectedly rises
The rise in unemployment The so-called thermal ruleis an indicator used to provide an early warning sign of an economic downturn. The rule states that a downturn is likely when the three-month moving average of the unemployment rate is at least 0.5 percentage points higher than its 12-month low.
The unemployment rate over the past three months has averaged 4.13%, 0.63 percentage points higher than the 3.5% forecast for July 2023. The Sarm Rule has accurately predicted every recession since the 1970s.
At the same time, new data from the Bureau of Labor Statistics released Wednesday showed that job growth for most of the past year was significantly weaker than previously reported.
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The BLS revised it downward. Total number of jobs The annual benchmark survey of preliminary payroll data showed that 818,000 jobs were created in the 12 months to March, suggesting that the economy added an average of 174,000 jobs per month during that period, down from a previous estimate of 242,000. On a monthly basis, it lost about 68,000 jobs.
“The labor market appears weaker than initially reported,” said Jeffrey Roach, chief economist at LPL Financial. “The deterioration in the labor market could allow the Fed to emphasize both sides of its dual mandate, and investors should expect the Fed to prepare the market for a rate cut at its September meeting.”
