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) last interest rate increase this cycle was 12 months ago. Fed officials have been patient while monitoring the impact of elevated rates on inflation and the labor market. Since the last rate hike, core CPI inflation has slowed, easing from an annual pace of 4.7% to 3.3%, while the unemployment rate increased from 3.5% to 4.1%. The Fed is unlikely to cut interest rates at their next FOMC meeting at the end of this month. However, an interest rate cut at their September meeting is a strong possibility, with the latest odds at more than 90%.
Looking at the most recent data, the unemployment rate edged higher in June to a 31-month high of 4.1%. Moderating labor market conditions is helping to pave the way for a Fed rate cut. Average annual hourly earnings growth is the slowest in 39-months, unemployment is rising, and the pace of payroll growth is moderating. On the inflation front, price pressures slowed a lot in the second quarter (Q2). Headline CPI increased at an annualized rate of 1.05% in Q2, the lowest since 2020, while core CPI increased at an annualized rate of 2.1%, the lowest in more than three years. Inflation on an annual basis is still above the Fed’s long-term target of 2.0%, but the trend is suggesting that price pressures are slowing.
The Fed will have two additional months’ worth of labor and inflation data to analyze before the start of the September FOMC meeting. If the recent trend of cooling inflation and moderating labor market conditions continues, the Fed is highly likely to cut interest rates in September. Waiting too long to cut rates could lead to an economic recession. Our position hasn’t changed, the weight of the evidence points to a continued path of easing inflationary pressures and a cooling labor market. We are maintaining the Fed-O-Meter in its current position.
