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) extended pause is likely coming to an end next month. While some Fed officials are tempering expectations publicly, economic data signals that a rate cut is imminent. The Fed increased interest rates to their highest level in more than 20 years to curb inflation, to meet its stated mandate to maintain price stability. The Fed’s other mandate, achieving maximum employment, faces risks as unemployment marches higher. Although the economy remains stable, maintaining high interest rates for too long increases the risk of recession. The futures market is currently pricing in at least a 0.25% interest rate cut at the September FOMC Meeting.

July’s labor market report indicated that job growth is slowing, with unemployment on the rise. The unemployment rate climbed to a 33-month high of 4.3%, nearly 1% above the 2023 post-pandemic cycle low. Additionally, wage growth decelerated to a 38-month low of 3.6% year-over-year. Labor market conditions have softened since the beginning of the year. Meanwhile, price pressures cooled in July, as shown by the latest CPI inflation report. Headline CPI inflation fell below 3.0% year-over-year for the first time since 2021. Core CPI inflation, which excludes food and energy, also slowed to levels last seen in 2021.

We anticipate the Fed will cut interest rates in September, with additional cuts before the end of the year. The futures market is already pricing in a 100% chance of at least a 0.25% rate cut at the September FOMC Meeting. Recent labor and inflation data support a rate cut. Additionally, bond yields have fallen significantly this summer, as bond investors anticipate lower interest rates ahead. We are moving the Fed-O-Meter dial to the left with Fed on the verge of shifting to a rate cutting cycle.