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For the first week of the month, it looked like we were entering the time-honored “dog days of August,” that foreboding mindset people get when they feel stuck in the mud and sense that things just aren’t going right. The first inkling of the blahs was delivered by the Labor Department on August 2, when it released a downtrodden employment report for July, which featured weaker than expected job growth and a dispiriting rise in the unemployment rate. The report spurred a knee-jerk response in the financial markets as recession fears suddenly exploded and sent stock prices tumbling. Adding rain to the parade, a few days later, the government agency delivered more grim news on the jobs front, reporting a spike in initial claims for unemployment insurance for the last week of July. Things looked grim indeed.
In the spring of 2022, the Federal Reserve embarked on a mission to wrestle inflation under control without cratering the economy. At the time, the Fed’s preferred inflation measure, the core Personal Consumption Deflator, was increasing at a 5.5 percent rate and the unemployment rate stood at 3.6 percent. Over the next 12 months, the Fed stepped on the brakes harder and harder, lifting its short-term policy rate from near zero to a range of 5.25 - 5.50 percent in July of 2023. At that point, inflation had retreated to 4.3 percent – good but not close enough to the central bank’s two percent target. With unemployment still at a historically low 3.5 percent, policymakers stayed the course, keeping rates unchanged at peak levels until it saw more progress on the inflation front.
While this week featured a light calendar of economic data, it was not without attention-grabbing news on the political and economic fronts. Unsurprisingly, Kamala Harris’ acceptance speech at the Democratic Nominating Convention garnered the largest national audience. But the most anticipated and consequential speech for global investors was delivered by Fed Chair Jerome Powell at the annual Jackson Hole Symposium on Friday morning. To be sure, no one expected earth-shattering news that would jolt the financial markets with a surprise announcement. Powell stayed on script, confirming the widely accepted view that rate cuts were coming, most likely starting at the September 17-18 policy meeting, as the Fed is shifting its priority away from tamping down inflation and toward propping up a sagging job market.
The Federal Reserve is a deliberative body that does not have the audacity to declare “mission accomplished” in its quest to achieve a soft landing; but it can justifiably savor the sweet spot the economy has clearly entered into early this summer. Growth is holding up, the job market remains resilient and, importantly, inflation is steadily cooling. These are the ingredients for the long sought-after soft landing, although the Fed believes the mix needs to marinate a little longer to complete the recipe. That said, the policy chefs are standing at the ready, poised to douse some of the interest-rate flames that threaten to overcook the meal.
First impressions are never a good look in economics. Not only do they often mislead investors, but they can also spur misguided efforts to influence policy. That notion was on full display the past two weeks, reflecting the markets’ dramatic knee-jerk reaction to a surprisingly weak jobs report last week that subsequent data suggest may be nothing more than a head fake. Still, the first impression delivered a wallop, sending stock prices and bond yields temporarily plummeting as recession fears spiked in the days following the release of the report.
The conversation about the Federal Reserve and the economy underwent a dramatic shift on Friday with the release of the all-important monthly jobs report. Traders and investors abruptly abandoned all skepticism as to whether the Fed will lower interest rates at its September meeting, The question now is not if, but by how much – and is it too late to keep the economy out of a recession? All eyes will be on Chairman Powell’s comments scheduled to be delivered at the annual Jackson Hole symposium on August 22-24. Many now think he will send a stronger signal that the rate-cutting trigger will be pulled for the first time in 4 1/2 years at the September 18 confab, abandoning the equivocating stance he conveyed at the press conference following last week’s FOMC meeting.