The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.
The Federal Reserve’s (Fed) “wait-and-see” approach to assess the economic impact of tariffs will likely keep interest rate cuts on hold through at least the upcoming FOMC Meeting at the end of July. As of this writing, the fed funds futures imply a 2% probability of a July rate cut, though the probability increases to roughly 54% for a rate cut in September.
The data dependent Fed focuses closely on key labor market and inflation indicators to guide policy decisions. While labor market conditions have softened this year, the unemployment rate is relatively low at 4.1%. Continuing jobless claims are trending higher, signaling slower hiring, but initial jobless claims are relatively low, indicating that layoffs are still subdued. On the inflation front, headline CPI inflation rose 0.3% M/M in June, the highest in 5 months, lifting annual inflation to 2.7%. Core CPI, which excludes food and energy, increased at a more modest 0.2% in June, slightly below expectations. Of note, some tariff-sensitive categories such as major appliances and home furnishings saw price pressures accelerate.
While an imminent rate cut is unlikely, the Fed could resume rate cuts as early as September if inflation data stabilizes or hiring weakens. For now, we are maintaining the Fed-O-Meter in its current position until a clearer path to rate cuts emerges.
