Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / Why the Fed Watches the August Jobs Report With Extra Care
Transcript
- Lucas: So the July jobs report came out on Friday, and the headline number was a genuine surprise: the U.S. economy lost 23,000 jobs. That's not what anyone expected, and it's the kind of number that makes the Fed sit up and take notice. Luna: And it wasn't just the headline. ADP came in earlier with just 44,000 private jobs added, which was also well below expectations. So the signal is pretty consistent. Lucas: Exactly. And for the Fed, this is a big deal because for months the story has been 'inflation is sticky but the labor market is holding up.' Now the labor market is starting to crack, and that changes the calculus. Luna: But inflation is actually cooling too. Core CPI ticked down in June, and the ten-year breakeven rate is sitting at 2.25 percent, down from 2.26. So is the Fed finally getting what it wants on both fronts? Lucas: That's the million-dollar question. Let's look at the data. The effective fed funds rate has been flat at 3.63 percent since July, and the interest on reserve balances is 3.65. So the Fed is holding steady, but the market is now pricing in a higher chance of a cut later this year. Luna: And the two-year Treasury yield has been creeping up, which is a bit odd if the market expects cuts. It's at 4.66 percent, up slightly over the week. What's that telling us? Lucas: Right, that's the puzzle. The two-year yield is essentially the market's guess at the average fed funds rate over the next couple of years. If it's rising while the Fed holds, the market might be saying the Fed won't cut as much as previously thought, or that the next move could be a hike if inflation reignites. Luna: But the jobs report is weak. How do you reconcile a weak labor market with a rising two-year yield? Lucas: Well, the Fed has been pretty clear that they're watching the wage signal. The jobs report includes average hourly earnings, and even if job growth is weak, if wages are still rising at a clip that's inconsistent with 2 percent inflation, they'll stay cautious. Luna: And what's the wage number doing? I don't think we saw it in the headlines. Lucas: We don't have the exact figure in our data feed, but historically, wage growth has been running around 4 percent year-over-year. That's still too high for the Fed's comfort. So even with job losses, they might worry that the labor market is tight enough to keep pushing wages up. Luna: So the Fed is caught between a slowing economy and sticky wages. That's the internal divide we've talked about before. Lucas: Precisely. And there's another layer. The ten-year breakeven rate, which is a market-based measure of inflation expectations, is falling. That gives the Fed some cover to be patient. If inflation expectations are anchored, they don't need to hike aggressively. Luna: But the yield curve has been steepening, which we covered in episode 134. That's usually a sign that the market expects growth to pick up or inflation to rise. How does that fit with a weak jobs report? Lucas: Good point. The curve steepening might be more about the long end, where term premium is rising due to fiscal concerns, not necessarily about near-term growth. The ten-year yield is at 5.21 percent, which is high, and that's partly a function of supply and the government's borrowing needs. Luna: So the bond market is sending mixed signals: short rates up, long rates up, breakevens down. That's confusing. Lucas: It is, and that's why the Fed tends to focus on the actual economic data rather than trying to parse every move in the yield curve. But they do watch the two-year and ten-year for clues about what the market expects. Luna: Let's go back to the jobs report. What's the Fed looking for specifically in the internals? I mean, beyond the headline. Lucas: They look at the unemployment rate, which we don't have the exact number for, but it's likely ticking up from the low levels we saw earlier. They also look at the labor force participation rate, and the breadth of job gains across sectors. A loss of 23,000 jobs is broad-based, but some sectors might be hit harder than others, like manufacturing or construction. Luna: And the revisions. They always revise the previous months, right? Lucas: Yes, and that's a key point. The initial print can be misleading. For example, last month's report might have been revised down, which would signal that the labor market was already weakening before July. The Fed will have that full picture when they meet in September. Luna: So what's the market pricing right now for the September meeting? Are they expecting a cut? Lucas: Based on fed funds futures, there's maybe a 60 percent chance of a 25 basis point cut. But that's not certainty. And the Fed has been cautious about signaling a cut too early, especially with the two-year yield rising. Luna: It feels like the Fed is in a wait and see mode, but the data is starting to force their hand. Lucas: That's exactly the tension. Let's talk about the Fed's dual mandate. They have to balance maximum employment and price stability. If the labor market is deteriorating, they might put more weight on employment. But if wages are sticky, they worry that cutting too soon could reignite inflation. Luna: And we've seen the Fed make mistakes on both sides. They were too slow to hike in 2021, and maybe too aggressive last year. So they're being careful. Lucas: Right. And that's why the next few data points are crucial. We have the August jobs report coming out in early September, just before the FOMC meeting. That will be the final piece of the puzzle. Luna: So if that report is also weak, and wages moderate, they might actually cut. Lucas: It would definitely strengthen the case. But they'll also look at the CPI reports for July and August, which we'll get before the meeting. If inflation continues to cool, that gives them more room to ease. Luna: Speaking of staying informed, we don't run ads on this podcast. That's a choice we've made to keep the content clean and focused. If you find these explanations helpful, you can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep the show going. Lucas: Yeah, it really helps. We appreciate everyone who's contributed so far. It lets us keep doing these deep dives without any commercial interruptions. Luna: Alright, back to the Fed. So what's the takeaway for the average person? How does this affect their money? Lucas: Well, if the Fed cuts rates, that could lower borrowing costs for mortgages and credit cards. But it also might mean the economy is slowing more than we thought, which could affect job security. So it's a mixed bag. Luna: And for investors, a cut might boost stocks in the short term, but if it's for the wrong reasons, it could be a warning sign. Lucas: Exactly. The market rallied this week, with the S&P 500 up 2.1 percent over five days, and the NASDAQ up 3 percent. But that's partly because investors are hoping for a cut. If the Fed doesn't deliver, we could see a pullback. Luna: So the September meeting is shaping up to be a big one. Lucas: It is. And the Fed is going to be data-dependent, as always. But the next few weeks will provide crucial information. Luna: What should we be watching for specifically? Lucas: First, the inflation reports for July and August. If core PCE continues to decline, that's a green light. Second, the wage number in the August jobs report. If it drops below 4 percent year-over-year, that's a sign that the labor market is cooling enough. And third, any commentary from Fed officials, especially Kevin Warsh, who we've talked about before. Their language can be a big tell. Luna: So we're in a make or break moment for the Fed's policy path. Lucas: I think so. The July jobs report was a wake-up call. The Fed can't ignore it. But they'll be careful not to overreact to one month of data. They'll want to see a consistent trend. Luna: And that's the smart approach. Data over headlines. Lucas: Exactly. So we'll be watching the calendar. And you should too, because the next FOMC decision is going to have real consequences for your finances.