Federal Reserve Chairman Jerome Powell speaks at the New York Times DealBook Summit held at Jazz at Lincoln Center in New York, USA, on Wednesday, December 4, 2024.
Yuki Iwamura | Bloomberg | Getty Images
Friday’s jobs report effectively confirmed that the Federal Reserve will approve a rate cut at its meeting later this month. Whether it should, and what it does from there, is another matter.
Not too hot, not too cold November non-farm employment data released Giving the central bank any leeway it might need to act, and markets responded in kind, raising interest rates Implied chance of reduction According to one report, this proportion is close to 90% CME Group Measurement.
However, the central bank is likely to face a heated debate in the coming days over how quickly and how far it should go.
“Financial conditions have eased significantly. The risk for the Fed is to create a speculative bubble,” Joseph LaVorgna, chief economist at SMBC Nikko Securities, told CNBC.scream box” said after the report was released. “There is no reason to cut interest rates now. They should pause.
LaVolnia, who served as a senior economist during Donald Trump’s first term as president and is likely to win the White House again, is not the only one skeptical of the Fed’s rate cuts.
FWDBONDS senior economist Chris Rupkey wrote that the Fed “does not need to revise its stimulus measures as jobs are plentiful,” adding that the central bank’s stated intention to continue cutting rates looks “increasingly Even less wise, because the inflationary fire has not yet been extinguished.
Jason Furman, who appeared on CNBC with LaVogner, also expressed caution, especially when it comes to inflation. Furman pointed out that the recent growth in average hourly earnings is more consistent with an inflation rate of 3.5%, rather than the 2% that the Fed prefers.
“This is another data point in a ‘no landing’ scenario,” Furman said of the jobs report, using the term for an economy that continues to grow but also sparks more inflation.
He added: “I have no doubt that the Fed will cut rates again, but when it will do so again after December is anyone’s guess, and I think unemployment will rise further.”
decision factors
During this period, policymakers will need to process a wealth of information.
start: November non-farm employment data The increase of 227,000 was slightly better than expected and a significant increase from October’s paltry 36,000. Adding those two months’ employment numbers together (October was affected by Hurricane Milton and the Boeing strike) averaged 131,500 jobs, slightly below the trend since the labor market first began to fluctuate in April.
But even with the unemployment rate rising 4.2% amid falling household employment, the employment outlook still looks solid, if not spectacular. Since December 2020, there has still not been a single monthly decline in employment.
However, there are other factors.
Inflation has started to increase recently The Fed’s preferred measures It rose to 2.3% in October, or 2.8% if food and energy prices are excluded. Wage gains also continue to be strong, with the current 4% increase handily exceeding pre-COVID levels dating back to at least 2008. Trump’s fiscal policy When will he begin his second term and whether his plan to impose punitive tariffs will further fuel inflation.
At the same time, the overall economy has been growing strongly. The annualized growth rate of gross domestic product in the fourth quarter is expected to reach 3.3% According to the Federal Reserve Bank of Atlanta.
Then there’s the issue of “financial conditions,” which includes Treasury and corporate bond yields, stock market prices, mortgage rates, and more. Fed officials consider the current range of overnight borrowing rates of 4.5%-4.75% to be “restrictive.” However, According to the Federal Reserve’s own measurement standardsfinancial conditions are at their lowest levels since January.
Earlier this week, the Chairman of the Federal Reserve Jerome Powell Praising the U.S. economy, calling it the envy of developed countries and saying it provides a cushion for policymakers move slowly When they readjust their policies.
Cleveland Fed President Beth Hammack pointed to the economy’s strong growth in a speech on Friday and said she needed more evidence that inflation is moving convincingly toward the Fed’s 2% progress towards the goal. Hammack advocated for the Fed to slow down interest rate cuts. If it follows December’s cuts, this would be equivalent to a full percentage point drop since September.
Looking for neutrality
“In order to balance the need to maintain a moderately restrictive monetary policy stance with the possibility that policy may be closer to neutral, I believe we have reached or are close to a reasonable point to slow the pace of rate cuts,” Hammack said, ahead of this year’s Federal Open Market Committee vote. member.
The only thing that could prevent the Fed from cutting interest rates in December is next week’s separate reports on consumer and producer prices. The consumer price index is expected to rise 2.7%. After Friday, Fed officials enter a quiet period and will not make policy speeches before the meeting.
The issue of a “neutral” interest rate that neither limits nor promotes growth is central to how the Fed implements policy. Recent indications are that this level may be higher than in previous economic circumstances.
Tom Porcelli, chief U.S. economist at PFIM fixed income, said what the Fed can do is implement a December rate cut as traders expect, skip January, and possibly cut rates again in early 2025 before taking a break.
“I don’t think there’s anything in today’s data that would really prevent them from cutting production in December,” Porcelli said. “When they raised interest rates, the inflation regime was completely different than what we have now. So in this case, I think Powell wants to continue the process of normalizing policy.”
Powell and other policymakers have said they are now giving equal attention to controlling inflation and supporting the labor market, whereas previously the focus was more on prices.
“If you want to wait until there are cracks in the labor market before you start cutting policy, it will be too late,” he said. “So to be cautious, I really recommend you start the process now.”
