Last week, over 28 million unique viewers tuned into the Games of the XXXIII Olympiad opening ceremony in Paris, France, double the combined state populations of Oregon, Washington and Idaho. The ceremony set the stage for the coming weeks of competition and allowed viewers to catch their first glimpses of the best athletes in the world. This week, investors were focused on a different stage: the Federal Open Market Committee (FOMC) press conference, which offered insight into the Fed’s future perspectives on inflation and employment.
At first glance, little of the FOMC’s commentary appears to have changed since their last meeting in June. Wednesday’s press release still paints a picture of an expanding economy experiencing decreasing (but still higher-than-target) inflation, job gains and low unemployment. A closer examination of the press release, however, reveals subtle changes.
Source: Ferguson Wellman
These comparisons make it clear that the FOMC is paying close attention to the impacts of the current Federal Funds Rate target on U.S. labor markets, with good cause. This morning’s updated U.S. Bureau of Labor Statistics (BLS) data, which indicates a more pronounced contraction in employment than anticipated, further underscores the importance of this focus, pointing towards a slowing labor market.
July’s unemployment rate of 4.3% came in higher than expected compared to 3.5% a year ago. The July nonfarm payroll, which indicates new jobs added, rose by a modest 114,000 jobs last month, below the expected 175,000 and June’s revised 179,000 figure. Lastly, jobless claims (the number of initial filings for unemployment) came in at 249,000, the highest claims number in nearly a year.
Source: U.S. Bureau of Labor Statistics
Just as the Olympic opening ceremony doesn’t announce any medal winners, this week’s FOMC meeting and press conference didn’t promise a Federal Funds Rate cut. Instead, it implied that they are ready and willing to cut rates if they see “risk” to employment levels in new economic data and if inflation continues to moderate. To many, July’s contractionary employment data begs the question: what data will the FOMC view as representative of “further risk” on the employment side? The FOMC’s acknowledgment of the already-moderating employment data and their newly dovish commentary, coupled with July’s contractionary employment data, show that rate cuts are likely to come sooner than later. We anticipate that the FOMC will reduce rates, as bond markets have already factored in this move. The only uncertainty for us is the magnitude of the rate cut. Like all market participants, we will wait until next month’s meeting to find out.
Takeaways for the Week
The FOMC unanimously voted to hold the target range for the Federal Funds Rate at 5.25% - 5.5%, but newly noted the committee is cognizant of the risks on both sides of its dual mandate of promoting maximum employment and keeping inflation low
Weekly jobless claims came in at 249,000, the highest claims level seen in nearly a year
The unemployment rate rose unexpectedly to 4.3% in July, and the month’s nonfarm payrolls came in at 114,000 jobs vs. the expected 175,000 jobs, resulting in both U.S. Treasury yields and major U.S. equity indices falling sharply on Friday morning in response