Employment and Growth Numbers Provide No Basis for Near-Term Cuts
In aggregate, current employment and growth data provides no basis for the Fed to pre-emptively ease policy. While the pace of job creation has slowed noticeably, on average, over the last several months, it remains above levels necessary to keep the unemployment rate stable. Initial unemployment claims remain low and job openings are close to record highs.
Admittedly, labor market indicators are among the slower-moving signals as to the health of the economy. But in today’s context, where many risks on the horizon relate to unpredictable (and easily reversible) policy actions such as tariffs, perhaps there is particular value in looking beyond the noise and considering some of these more stable data sets. After all, the manufacturing/industrial sector is by nature more prone to up and down cycles, but these do not always translate into broader economic weakness—as happened in 2016.
We value employment data because employment provides household income stability and household income stability engenders consumption stability. Remember: if the consumer and services hold, the economy holds. It is also interesting to note signs of revival in the housing sector, including the recent spike in mortgage refinancing applications: not only should this free up cash for those able to refinance, but data trends suggest housing could be a stabilizing force in this latter part of the cycle, rather than a contributor to its demise.
“Inflation” Argument Remains Weak
Recent inflation data could perhaps be seen as providing circumstantial support for a more accommodating stance. In a recent speech to the New York Economic Club, Fed Vice-Chair Clarida noted that “the range of plausible estimates for u* [the natural level of unemployment] may extend to 4% or even below” and that “indicators suggest that longer-term inflation expectations sit at the low end of a range that I consider consistent with our price-stability mandate.”
However, we view an inflation-based argument as a “slower moving” argument compared with a “meaningful shock” argument (since such a shock threatens to tank the economy in short order and therefore demands a quick policy response). Indeed, as a first order response, we believe that the implication of Clarida’s speech is that the Fed’s current “patient pause” can be extended further, even in a best-case macro scenario, rather than that rate cuts are urgently needed right now.
Recent inflation data presents an interesting conundrum for the Fed. There is the obvious challenge that, having described the current inflation softness as “temporary”, responding to it by cutting rates would imply the weakness is actually persistent. One would at the very least expect the Fed to clarify its views before acting.