Ryan Sweet, Chief U.S. Economist at Oxford Economics, has seen enough now, on the inflation side and the labor market side, to be conclude that the Fed can and will start cutting rates at it its September meeting.
On the inflation side of the ledger, July consumer price index above all has sealed the deal for him as it continues to move toward its 2% inflation target. “I think the overall takeaway is that the inflation continues to move… in the correct direction,” towards the Fed’s 2% target. '
”Basically you never want to say ‘its a slam dunk’ in economics,” he adds. “But this is pretty much a layup for the Fed to cut interest rates in September.”
Chair Jay Powell along with with the Fed’s policy-setting governors and regional bank presidents, has repeated for months that he, and they, need to see evidence that inflation is falling “sustainably” toward 2% before they start cutting rates. Is there any chance the could decide to hold out for more numbers showing it’s time to move?
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Ryan Sweet: “I think that would be in a policy error. I think you know the fed has kind of communicated, you know. For an extended period of time. They they've been planning and expecting to be able to cut interest rates at some point this year. I think it's not just the inflation data, the labor markets no longer taking a back seat to the inflation data that's really moved up on the Fed's radar because there are downside risks to the labor market, and if for the fed to really pull off this soft or softish type landing they need the labor market to hang in there, and the longer that they wait, the greater the risk that you know something… pops up in the labor market.
”Why, wait, you know. Just to get a few more inflation numbers which all seem to be moving in the right direction. Why wait for a few more jobs numbers after September, when it's clear that the job market has softened. I don't think it's as weak as people make it out to be, but you know from a risk management approach would argue that the fed should (already) be cutting. “
As for the labor market, Ryan sees the jump in the July unemployment rate from 4.1% to 4.3% — kicked off the huge stock market selloff and calls for emergency rate cuts of up to 70pbs - as not accurately understood. A big reason for the jobless rate jump was due to people coming back into the labor force looking for jobs and finding a labor market that is not creating enough positions for them to find them. This is different from people who lose their jobs and are suddenly unemployed. And there are many other labor market indicators like the still low-level of claims being filed for new unemployment compensation suggesting the labor market is still doing okay.
Until we see big increases in a variety of labor market measures, with jobless claims at the top of the list, he says will not see the need for 50bps cuts.
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Ryan Sweet: “If that continues to move higher over the next 2 to 3 weeks, you know that would be an indication that layoffs are on the rise. We do get the August employment report before the September meeting that would most likely have to show the unemployment rate moved even higher, or got stuck right around where it was with permanent layoffs for rising.
”So you know, the the composition of why the unemployment rate is at 4.3 would have to shift from re-entrants (to the labor market) to permanent job losers. I think that's a pretty high bar to jump between now and the September meeting, but as long as the job market continues to hang in there, I think the Fed is going to avoid this knee jerk reaction of cutting by 50 basis points…”
”… I think the fed is not, gonna you know, panic and overreact to, you know, an unemployment rate that's still in the low four percents.”
We covered a lot more ground. In terms of the elections how Democrats and Republicans feel supported by different sides of the current inflation situation. What message Chair Powell may want to send when he kicks off the Kansas City Fed’s Annual Symposium in Jackson Hole next Friday.
Agree with Ryan or not, you could learn a lot, test your own views, by listening to his. And remember you can always access the transcript right here if you are short on time and what rather read than listen. Either way, check it out.
Ryan Sweet is the Chief US Economist at Oxford Economics. He is responsible for forecasting and assessing the US macroeconomic outlook and how it will influence monetary policy and financial markets. He is among the most accurate high-frequency forecasters of the U.S. economy, according to MarketWatch and Bloomberg LP.
Prior to joining Oxford Economics, Ryan led real-time economics at Moody's Analytics and was a member of the U.S. macroeconomics team. He was also head of the firm’s monetary policy research, following actions by the Federal Reserve and examining its potential impact on the U.S. economy.
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