by Blaine Dickason
Senior Vice President
Portfolio Management and Trading
“We do not seek or welcome further cooling in labor market conditions.” Fed Chair Jerome Powell, August 23, 2024
In what is commonly known as their dual mandate, the Federal Reserve is charged by Congress to effectively promote both maximum employment and stable prices in the U.S. economy. While these two goals are coequal, we know that our central bank may be focused on one mandate more than the other depending on the circumstance. During the spring of 2020, when more than 20 million Americans lost their jobs, the Fed was focused on the employment side of their mandate, slashing interest rates to nearly zero, and providing monetary stimulus to support an economic recovery. For the following three years, they were correctly focused on the price stability side of their mandate, which they have defined as a 2% annual inflation target. With their preferred inflation gauge running below that explicit target over the last three months (+1.7% annualized), and some recent softening in the labor market, it is indeed appropriate for the Federal Reserve to have a renewed focus on their maximum employment mandate as they determine the path for their interest rate policy going forward.
Multiple measures of the labor market over the last several months have indicated a normalization or downshift has been taking place. Furthermore, supply and demand dynamics have moved towards equilibrium after several years of very tight labor markets. While a return to equilibrium is a welcome development and endpoint for the Fed, they must remain on guard that the labor market does not weaken further, and especially not from leaving their interest rate policy at its current restrictive levels for too long. Earlier this week, a monthly report on job openings and turnover (JOLTS) in July indicated there were nearly a half million fewer job openings than estimated, a sign that the demand for labor is cooling.
This morning, the Bureau of Labor Statistics delivered their highly anticipated monthly employment report. The key results were the addition of 142,000 jobs, and a decline in the unemployment rate from 4.3% in July to 4.2% in August. While the August job gains exceeded those from July, they were slightly below market expectations of over 160,000 jobs added. Coupled with a cumulative 86,000 job downward revision to the prior two months, today’s report will confirm to the Federal Reserve that the job market is indeed slowing down, and their signaled plan to begin cutting interest rates at their upcoming meeting on September 17 and 18 is indeed appropriate.
At last month’s Jackson Hole economic symposium, Federal Reserve Chair Powell made it clear the direction of their interest rate policy was lower as he helped guide markets to expect a first interest rate cut this month. The American consumer has been the linchpin for the U.S. economy, the largest and most dynamic in the world. Full employment drives aggregate personal income and spending, both of which are critical to an economy that is 70% consumer driven. After achieving a rare ‘soft-landing’ for the U.S. economy following their inflation fight, the Fed’s next challenge will be to determine how far and how fast to cut interest rates to sustain maximum employment and perpetuate our current economic expansion.
Takeaways for the Week:
Mortgage rates have declined to their lowest levels in over a year as markets look ahead to the Federal Reserve cutting interest rates. The Bankrate.com U.S. Home Mortgage 30 Year Fixed national average declined to 6.76% this week, down from over 8.0% last fall
On Wednesday next week, the Bureau of Labor Statistics will report the Consumer Price Index (CPI) for August, a key inflation measure and the last significant economic release before the FOMC meeting on September 17 and 18. Current estimates are +2.6% year-over-year, down from +2.9% last month and +3.7% for August of last year