The view from the Fed
The Federal Reserve on Wednesday released the minutes of the Federal Open Market Committee meeting that was held at the end of July. This data is three weeks old, but provides a window into the discussions at the Fed. Interestingly, several committee members wanted to start cutting rates by 25 basis points already. The minutes noted that “the Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance.” Financial conditions at the time appeared to be providing neither a headwind nor tailwind to growth.
Consumer price inflation continued to lessen but was recognized as still elevated. Many participants noted that reported payroll gains might be overstated (they were, as we just found out), and several assessed that payroll gains may be lower than those needed to keep the unemployment rate constant with a flat labor force participation rate. The vast majority observed that if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting in September.
Jackson Hole Airport – It’s a challenge to land there
The Federal Reserve Bank of Kansas City will begin its annual Economic Policy Symposium today through Saturday in Jackson Hole, Wyoming. This marks the symposium’s 47th year and will explore lessons learned from the response of monetary policy to both the pandemic and the subsequent surge in inflation. As we know, central banks worldwide adopted historically accommodative policy to offset the pandemic shock. Then, as inflation surged to multi-decade highs, monetary policymakers responded with one of the most rapid tightening cycles ever.
One question that will probably be addressed at Jackson Hole is why past rate increases have not slowed the economy more? Despite a large and rapid increase in the policy rate since March 2022, economic activity has remained resilient even as inflation has been curtailed. The Fed argued last year that private-lending spreads, the difference between the policy rate and rates private-sector borrowers pay, were surprisingly low. That was cited as a major factor for why rate hikes have not slowed the economy more. If spreads are not as sensitive to rate cuts as they are to rate hikes, then that may dampen the effect of expansionary monetary policy.
The Jackson Hole airport can be tricky to land at because of the crosswinds, frequently changing weather, high altitude, nearby mountains, and a landing runway that slopes downward. The economy still poses several challenges, and we will get some additional data on jobless claims, existing home sales and purchasing managers sentiment this week. A Canadian railroad strike that just started could impact supply chains and inflation adversely. These data points may create more turbulence ahead until we get better clarity on policy moves and economic impact.
On revision, less jobs were added than reported
The U.S. added 818,000 fewer jobs than previously reported from the spring of 2023 to the spring of 2024, meaning 2.1 million jobs were created from April 2023 to March 2024 instead of the 2.9 million reported. These numbers get revised every year, but this is the largest revision in 15 years. The revisions lower indicate that the labor market began to cool off earlier and faster than it previously appeared. The revised estimate of employment growth translates into an average of 173,000 jobs a month created during this period instead of 242,000 under the old estimates. The lower number of new jobs created gives further incentive for the Federal Reserve to cut interest rates in September. Some economists attribute the revision lower in part to the so-called birth-death model, an adjustment (read guess) to account for the assumed net number of businesses opening and closing. That guess was most likely off the mark in the post-pandemic period.
On August 8th, an Alaska Airlines/SkyWest flight was forced to divert and get a new pilot after reportedly telling passengers that the pilot was not qualified to land in Jackson Hole, Wyoming.
The plane circled the airport before heading off to Salt Lake City about 300 miles away. The passengers were stuck on the plane for another 90 minutes while Alaska Airlines tracked down a pilot who was qualified to land there. They finally arrived in Jackson Hole, but more than three hours late.
The Fed is certainly qualified to land the plane after circling the past year, though a hard or soft landing for the economy remains to be seen. Investors have been diverted several times waiting for interest rate cuts that have not yet arrived. We experienced significant turbulence in markets a couple of weeks ago, though markets have generally recovered. Considering lessening inflation, weaker than assumed job creation, and risks to being late, a September rate cut is looking more like an on-time arrival.
Actor and comedian James Corden turns 46 today, Ty Burrell turns 57, Kristen Wiig turns 51 and pop singer Dua Lipa turns 29.
Christopher Crooks, CFA®, CFP® 610-260-2219