Everyone is talking about the Fed…speculating about when will Powell cut rates…by how much…etc…etc… I am not an economist, but I do love dissecting data and trends and it’s pretty fascinating how inversely correlated consumer prices and unemployment rates have been over the very long term. Historical trends suggest that the fed has generally achieved its mandate to balance maximum employment and stable prices. Taking a long term view, it seems like the current spread between unemployment (red line) and CPI trend (blue line) does not warrant drastic cuts in the fed funds rate (green line). What am I missing?
Powell already signaled that they were done with inflation and are laser focused on the labor market now. Last week of labor market data releases: * Job openings per unemployed worker is trending down (still above 1 but it’s on the move). * # jobs created up but not as much as previous months * Underemployment starting to tick up Quarter point cut minimum is all but guaranteed and I’d like to see a half point cut.
If you ask ChatGPT about reliability of economic indicators during Election years . Also ask for poison pill on Fed and republicans.
Agree
Ben Witten Please see my latest post for some additional ingredients.
Chief Economist
3moBen Witten, you’re not missing anything. In a world in which risks were perfectly balanced between inflation-too-high and employment-too-weak, the Fed’s policy interest rates would be lower than they are now. The easing of inflation enables the Fed to focus more on the labor market and creates space for them to cut rates depending on their evaluation of the relative risks going forward. As you noted, though, the available data, including yesterday’s employment situation, do “not warrant drastic cuts.” My employment forecasting model suggests that the probability of a recession in the next 12 months has jumped to about 61%. Interestingly, the jump wasn’t driven by the weaker-than-expected employment growth. Rather, the Near-Term Forward Spread (analogous to the slope of the yield curve, but more accurate for this purpose) deteriorated during August, reflecting the market’s forecast of a decline in the Fed Funds rate, while single-family housing starts have dropped sharply. My own judgment is that the currently available data do not suggest a movement from 61% to 100%, so I agree with you that the current situation “does not warrant drastic cuts.”