Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / How the Fed Reads the July Jobs Report
Transcript
- Lucas: So the July jobs report landed Friday, and the headline number was ugly — the economy lost twenty-three thousand jobs. That's the first outright decline we've seen in years, and it caught a lot of people off guard. Luna: But the unemployment rate stayed put, right? I think it held at four-point-one percent. That feels like a strange combination — fewer jobs, but no one new falling out of work. Lucas: Exactly. And that's the first thing the Fed notices. When payrolls go negative but the unemployment rate doesn't budge, it usually means the weakness is concentrated — maybe in one sector, or in the household survey versus the establishment survey. You have to look under the hood. Luna: So where did the losses show up? Was it broad-based or just a couple of industries? Lucas: It looked mostly like a pullback in temporary help and manufacturing, which are often the first places to crack when the economy slows. But the ADP report earlier in the week told a similar story — private companies added just forty-four thousand workers in July, way below expectations. So the signal is consistent: hiring is cooling, but it's not collapsing. Luna: Cooling, not collapsing. That's the kind of distinction the Fed loves to make. But how does that translate into their rate decision? They've been on hold for a while now. Lucas: Right, the effective fed funds rate has been sitting at three-point-six-three percent since July, and the Fed's been in that patient mode all summer. But this jobs report gives them cover to start easing. The market is already pricing in a cut at the September meeting, and I think the Fed is moving in that direction. Luna: But wait — inflation is still sticky. Core PCE ticked up to one-thirty-point-three in June. How do they justify cutting rates when their main target is still above target? Lucas: That's the real tension. Core PCE is running at something like two-point-eight percent year-over-year, still above their two-percent goal. But the Fed has shifted their framework — they're not just looking at the level of inflation, they're looking at the direction. And you've got ten-year breakevens at two-point-two-five percent, which tells you the market expects inflation to keep drifting lower. Meanwhile the two-year Treasury yield has been falling, which suggests investors think the Fed will have to ease soon. Luna: So the bond market is doing the Fed's homework for them. But isn't there a risk that the Fed overreacts to one soft month and ends up cutting too early? Lucas: That's exactly the debate inside the Fed. You've got hawks who say the labor market is still tight — the unemployment rate is low, and wage growth, while cooling, is still positive. They'd argue that one month of negative payrolls isn't a trend. But doves would say the trend has been softening for months — look at the revisions to previous months, look at the ADP number, look at the decline in temp workers. When you stack it up, the case for a cut in September is pretty strong. Luna: And the Fed has been careful not to commit, right? They keep saying 'data-dependent.' But at some point, the data makes the decision for them. Lucas: Exactly. The Fed has been saying they need 'more confidence' that inflation is moving sustainably toward two percent. The July jobs report gives them that confidence on the growth side — it says the economy is slowing, which historically has led to lower inflation. But the catch is that core PCE is still sticky. So the Fed might frame a September cut as 'insurance' rather than a full pivot. Luna: Insurance — like a hedge against a potential downturn without committing to a long easing cycle. Lucas: Precisely. And that's why I think they'll cut by twenty-five basis points, not fifty. The economy isn't in freefall — the unemployment rate is still low, and consumer spending has held up. But the direction is clear: slower growth, cooler labor market, disinflation continuing. That's a recipe for a modest rate cut. Luna: And what about the yield curve? The two-year has been bouncing around, but it's still below the ten-year, right? That's an inverted curve, which usually signals recession. Does that worry the Fed? Lucas: The curve has been inverted for a while now, but the Fed tends to look at the real rate — the nominal yield minus inflation expectations. And with ten-year breakevens at two-point-two-five percent, the real ten-year is around two-point-five percent. That's not extraordinarily restrictive, but it is tight. If the Fed cuts, that should help bring the curve back toward normal. Luna: So the market is already pricing in a cut, but the Fed hasn't said anything definitive. How do they manage expectations without causing a panic? Lucas: That's the dance. They'll use the Jackson Hole symposium later this month to signal their lean. Kevin Warsh, who's been vocal on the board, has already hinted that the Fed is 'closer to a policy adjustment.' That's Fed-speak for 'we're about to cut.' Luna: And you think they'll go in September? Not October or later? Lucas: I'd say there's a strong probability. The July jobs report removes the main argument for waiting — the labor market is clearly softening. And with inflation still moving down, albeit slowly, the risk of waiting is that they fall behind the curve. The Fed doesn't want to be the one who waited too long and caused a recession. Luna: That's a good point. But there's also a risk of cutting too soon and then inflation reaccelerating. That would be a credibility hit. Lucas: Right, and that's why the Fed is so careful. They have to balance the two-sided risks. But look at the data — core PCE is still above target, but it's not accelerating. The trend is your friend, as they say. And the labor market is sending a clear signal. I think they'll act in September, and then reassess. Luna: So for someone listening who's trying to understand the Fed's next move, what's the key takeaway? Lucas: The key takeaway is that the Fed is data-dependent, but they're not data-reactive. They look through the noise. The July jobs report is one data point, but it fits into a broader mosaic of slowing growth and cooling inflation. The market has already adjusted its expectations. The Fed will likely deliver a cut in September, but they'll frame it as a recalibration, not a rescue mission. Luna: And if the next couple of months show the labor market stabilizing, they could pause again. It's not a one-way street. Lucas: Exactly. They'll watch the August jobs report, which comes out in early September — literally days before the FOMC meeting. That's going to be a big one. If it shows a rebound, they might hold off. But if it's weak again, a cut is almost certain. So that report is going to be a major market mover. Luna: And what should listeners watch for in that report? Are there any particular numbers that will stand out? Lucas: Look at the private payroll figure, not just the headline. Also watch the unemployment rate and average hourly earnings. If wages start to accelerate, that would complicate the inflation story. But if they keep cooling, that gives the Fed even more reason to cut. Luna: So we're basically in a waiting game now. The Fed is trying to thread the needle, and the market is watching every data point. Lucas: That's the nature of monetary policy in a transition period. And honestly, this is one of the more interesting moments in recent Fed history — they're trying to achieve a soft landing, and the data is giving them mixed signals. It's a real test of their communication skills. Luna: Well, if today's conversation helped you make sense of what the Fed is watching, that's exactly what we're here for. And if you want to keep getting these breakdowns without ads, listener support is what makes that possible. You can buy me a coffee at buy me a coffee dot com slash fexingo. It's a small way to keep the show going. Lucas: Yeah, and it genuinely helps us keep doing this. But back to the Fed — I think the bottom line is that the July jobs report has shifted the debate. The question now is whether the Fed will act in September or wait for more confirmation. My bet is they act. Luna: And we'll be watching. Thanks for joining us on this deep dive. Until next time.