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 lowered interest rates by 0.25% at its September FOMC meeting, marking the first rate cut since last December. While this cut was widely anticipated, the Fed’s updated Dot Plot suggests a median expectation of two additional cuts, totaling 0.5%, by the end of the year. During the post-FOMC press conference, Fed Chair Jerome Powell emphasized a shift in the balance of risks from inflation to the labor market. He described the policy move as a risk management cut, aimed at supporting employment.
Inflation has picked up, but there hasn’t been a surge in price pressures. Headline CPI inflation climbed 2.9% year-over-year (Y/Y) in August, up from +2.7% in July, while core CPI held steady at 3.1% Y/Y. Over the past three months, headline CPI has increased at a 3.5% annualized pace, while core CPI has risen 3.7% annualized. At the same time, labor market momentum has slowed considerably, with nonfarm payrolls rising by an average of just 27,000 per month over the past four months. Weaker job growth has contributed to slowing wage pressures. Average hourly earnings rose 3.7% Y/Y, down from earlier levels. Softer wage pressures may help keep inflation in check.
The Fed has resumed rate cuts, and another cut is likely at the October FOMC meeting. We are maintaining the Fed-O-Meter in its current position for now.
