Fed to Ease: Data Don't Matter!

Rate Cut on September 18 is Preordained

A series of data over the past week suggested that the US economy is softening but is nowhere close to recession — just the result that the Federal Reserve says it wants to achieve. That did not stop policymakers from indicating not only that a rate cut will arrive on September 18 but also that additional reductions should be expected by year-end. Obviously, members of the central bank have yet to learn the dictum, “If it ain’t broke, don’t fix it!”

Let us start with the much-awaited August payroll data that the Bureau of Labor Statistics released yesterday. 142,000 nonfarm jobs were created last month, beating the downwardly revised 89,000 jobs in July. Even after the revisions, 116,000 jobs per month were created on average over the past three months. Rather than rejoice over the continued strength of the economy, equities reacted with a downward move. Investors were not happy that last month’s employment fell below the 160,000 that the consensus had anticipated, and wished that the figure would have been close to the 200,000 monthly rate it was previously running at.

Talk about having the cake and eating it too! Investors would like inflation come down to the Fed’s 2% target but yet, have the economy grow at full throttle.

Yesterday’s data also showed that the unemployment rate had come down from 4.3% in July to 4.2% in August. This was achieved without a reduction in the labor force participation rate which remained unchanged at 62.7%. Good news for the Fed as well as markets? Not really, the development appears to have pleased no one. Governor Christopher Waller suggested that the first rate cut in 14 months should arrive later this month. John Williams, President of the New York Fed, often considered to be the second most senior official in the Federal Reserve hierarchy, is also clear he wants a rate cut, he just has not made up his mind as to how large the reduction should be.

As officials fell over each other trying to demonstrate their bona fides as monetary policy doves, there was potential trouble on the cost front. Average hourly earnings accelerated on both month-to-month and annual bases. The increase was 0.4% last month, twice the 0.2% pace in July. Over the past year, average hourly earnings have risen by 3.8%, surpassing both the 3.6% in July and the 3.7% that the consensus had anticipated for last month. Expect his to be passed on in prices.

In addition to this indicator of strength in the labor market, the average workweek rose from 34.2 hours in July to 34.3 hours last month. No sign of weakness here. The most recent figure matched those during April through June, suggesting that the drop in July in the number of hours worked was probably due to special factors such as the impact of Hurricane Beryl. It would make little sense to determine monetary policy based on such events!

And not all the relevant factors for a Fed decision came just yesterday. We learned Wednesday from the Bureau of Labor Statistics’ JOLTS data that although the number of job openings had dropped to 7.67 million from 7.91 million — below the expected number — the quits rates had increased. This measures the number of voluntary exits from existing jobs, and is a sign of labor market strength. Then came news on Thursday that initial jobless claims fell for the third consecutive week to 227,000 during the week ending August 31. The figure had been as high as 250,000 during the week ended July 27.

The motivation is clear for investors in risk assets to react to the bad news and downplay the positive. Lower market valuations would push the Federal Reserve to institute policy easing and cause a rally, much to the delight of those in the markets. However, why do Federal Reserve officials play along rather than keep their focus on employment and inflation, as their mandate requires? In other words, why are there fewer, disciplined Paul Volckers on the scene today?

A clue comes from who Fed officials may be appealing to. Recent history suggests that being on the Federal Open Market Committee is just a way station for some of them, especially for those who have come from the private sector. Their post-FOMC positions are also often in the private sector where investors (aka future employers) benefit more from appreciation in risk asset valuations than be hurt by higher inflation rates.

All this prompts the figurative tears that we have seen Chairman Jerome Powell shed at the start of post-FOMC press conferences to demonstrate his concern for the pain suffered by low-income families due to inflation. In turn, shedding tears would make it politically easier to provide the Powell Put that we have seen on several occasions since January 4, 2019 when he unexpectedly shifted from tightening to easing during the first year of Chairmanship.

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

September 7, 2024

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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