Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / How the Fed Navigates Sticky Jobs Data and Flat Rates
Transcript
- Lucas: ADP reported this morning that private payrolls grew by 122,000 in May. That is stronger than economists were expecting, and it lands right in the middle of a stretch where the labor market has been sending mixed signals. Luna: Mixed how? We just saw job openings jump to 7.6 million in April, the highest in nearly two years. That's pretty unambiguous. Lucas: It is on the surface. But when you layer in the Fed's preferred inflation gauge—core PCE is still running above target at 129.6 on the index, up from 129.32 last month—and the fed funds rate is sitting at 3.62 percent, you start to wonder: why isn't the Fed reacting? Luna: Right, because conventional wisdom says strong jobs plus sticky inflation equals rate hikes. Lucas: Exactly. But the Fed is signaling patience. One reason: the ten-year breakeven inflation rate actually ticked down to 2.39 percent as of yesterday. That's the market's expectation for average inflation over the next decade, and it's moving in the opposite direction of the hard data. Luna: So the bond market is basically telling the Fed, 'Don't overreact to one hot jobs number.' Lucas: That's the read. And the Fed under Chair Powell has been explicit that they want to see a sustained pattern, not just a single data point. The May ADP number is one month. April's JOLTS data is one month. But the trend in breakevens has been drifting lower for weeks. Luna: Let's talk about what 'sustained pattern' looks like. What are they actually watching? Lucas: Three things mainly. First, the monthly payrolls average over a rolling three-month window. Second, the core PCE year-over-year change—not month to month noise. Third, wage growth as measured by the employment cost index. All three have been slowly cooling since late 2024, but none have dropped enough to declare victory. Luna: And yet the fed funds rate has been flat at roughly 3.63 percent since May. No cuts, no hikes. Lucas: Right. The effective rate was 3.63 in April, 3.62 as of June 1st. Practically unchanged. The Fed is in a 'wait and see' posture that looks a lot like the mid-1990s, when Alan Greenspan held rates steady for over a year even as the economy added jobs. Back then, the concern was that productivity gains would keep inflation contained—and they did. Luna: So you're saying the Fed might be betting that technology—AI, automation—is boosting productivity enough that the economy can run hotter without sparking inflation. Lucas: That's one interpretation. But the evidence is mixed. Productivity growth in the nonfarm business sector did pick up in 2025, but it's still below the pace of the late 1990s. Plus, the geopolitical backdrop is different now. The Iran situation is pushing energy costs higher—euro zone inflation just hit 3.2 percent partly because of that. Luna: And we've got fresh tariffs proposed on 60 economies today. That's a supply shock that could feed into core goods prices. Lucas: Exactly. So the Fed is juggling a labor market that keeps producing jobs, an inflation measure that's still above target, bond market signals that say inflation expectations are anchored, and external shocks from geopolitics and trade policy. No wonder they're in no rush. Luna: It feels like the data is pulling in different directions. But if you had to pick one number that best explains the Fed's current stance, what would it be? Lucas: I'd pick the ten-year breakeven inflation rate at 2.39 percent. That number says the bond market trusts the Fed to keep long-run inflation near target. If that number jumps above 2.5, you'd see a very different conversation. But for now, the Fed can afford to wait. Luna: You know, speaking of trusting the Fed—this show exists because people trust us to make sense of this stuff without the spin. And that only works because listeners like you keep it ad-free. Lucas: Yeah, it's a small thing, but a couple of dollars a month genuinely keeps these going. If walking through the economy with us has made something click, buy me a coffee dot com slash fexingo goes directly to keeping the lights on. Luna: No pressure. Just if you've gotten something out of it. And now back to the data. Lucas: So where does that leave us for the next FOMC meeting? The next one is mid-June, and the probability of a rate change is essentially zero based on fed funds futures. The statement will likely repeat that 'the committee remains data-dependent' and that 'inflation remains elevated.' The real action is in the dot plot—will they signal one cut later this year? Luna: The market is pricing in about a 40 percent chance of a cut by September. But if today's ADP number is followed by a strong BLS report on Friday, those odds could drop. Lucas: Right. And the BLS report includes average hourly earnings, which the Fed watches closely. If wages accelerate, that's a reason to hold. If they moderate, the doves get more ammunition. It's really a two-data-point week: ADP today, BLS Friday. Luna: So concretely, what should a listener do with this information? If you're an investor, does this tell you anything about positioning? Lucas: I'd say the big takeaway is that the Fed is not reacting to any single number. So if you're trading on a jobs report, you might be disappointed. The bond market is already pricing in a long hold. The ten-year yield is at 4.49 percent, the two-year at 4.22. That spread is about 27 basis points—still positive, still suggesting no recession fear. Luna: Positive yield curve. That's a shift from the inversion we saw in 2023 and 2024. Lucas: Exactly. The curve normalized in late 2024 and has stayed that way. That's actually consistent with a soft landing scenario, where the Fed manages to cool inflation without crashing the economy. The jobs data supports that—122,000 is solid, not overheating. Luna: One thing I want to come back to: the euro zone inflation number. Does that matter for the Fed? Lucas: Indirectly, yes. If the ECB feels forced to hike or hold higher for longer, that strengthens the dollar, which can weigh on U.S. exports and eventually slow growth. But the more direct channel is energy—if global oil prices stay elevated because of the Iran situation, that feeds into CPI. The Fed's preferred measure, core PCE, excludes food and energy, but headline inflation affects consumer expectations. Luna: And the breakeven rate we keep mentioning already captures those expectations. So the Fed is watching the same thing we are. Lucas: Right. That's the beauty of the breakeven—it's a market-based measure that aggregates all those concerns. And right now it's saying, 'Stay calm.' Luna: So to sum up: jobs are solid but not screaming, inflation is sticky but expectations are contained, and the Fed is comfortable waiting. The real risk is an external shock that breaks that equilibrium. Lucas: Exactly. And that's why we'll be watching the next round of tariff announcements, the Iran ceasefire talks, and Friday's BLS report all with the same question: does this change the breakeven? Because if it does, the Fed will have to move.