Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why the Lowest Jobless Claims in Years Aren't Worrying the Fed
Transcript
- Lucas: So initial jobless claims dropped to 187,000 last week. That's the lowest level we've seen in years — a number that normally screams 'the economy is running hot.' But the Fed isn't sweating it. Why? Luna: Right, because usually when claims get that low, you'd expect the Fed to be worried about overheating. So what's different this time? Lucas: Well, look at the inflation side. Core CPI dipped slightly to 336.1 in June, and the 10-year breakeven inflation rate is down to 2.26%. That's still above the Fed's 2% target, but it's moving in the right direction. And wage growth? Average hourly earnings ticked up to $37.60, but that's only a 0.24% month-over-month gain — not enough to fuel a wage-price spiral. Luna: So the Fed is basically saying: the labor market is strong, but we're not seeing the inflationary consequences we used to expect. That's a big shift from the post-pandemic playbook. Lucas: Exactly. And that's why Kevin Warsh's recent comments are getting so much attention. Fed watchers are zeroing in on three phrases he used: 'further progress' on inflation, 'sufficiently restrictive' policy, and 'patience.' The message is clear — the Fed sees this tight labor market as sustainable, not threatening. Luna: But isn't the bond market pushing back a bit? I'm looking at the 10-year yield at 4.68%, up about 2.3% in the last five days. That suggests investors are pricing in fewer cuts. Lucas: You're right. The yield curve is steepening again — the 2-year is at 3.81%, so the spread is widening. That's the market saying the economy is too strong for the Fed to cut aggressively. But the fed funds rate is stuck at 3.63%, and the Fed's language reinforces that they're in no hurry. Luna: So we have this paradox: the labor market is tightening, inflation is cooling but not gone, and the Fed is holding steady. What breaks the stalemate? Lucas: It's remarkable how much detail we can dig into here — if you find these breakdowns useful, there's a simple way to keep them coming. A couple of dollars a month genuinely makes a difference. If you've gotten something out of these episodes, buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that really helps keep the show ad-free and focused on the substance. We appreciate it. Lucas: So back to that stalemate — I think the key is the JOLTS data. Job openings ticked up to 7.594 million in May, up from 7.585 million. That's still a lot of demand for workers, but it's not accelerating. And the quits rate — well, we don't have that number here, but if it stays low, it suggests workers aren't jumping ship for higher pay. Luna: That's the 'labor market rebalancing' the Fed keeps talking about. Less churn means less upward pressure on wages. Lucas: Precisely. And the unemployment rate fell to 4.2% in June, down from 4.3%. So more people are finding work, but without sparking a bidding war for talent. That's exactly the soft landing scenario. Luna: But there are risks. Import prices from China just hit their highest since 2008, according to a headline. If tariffs expand — Trump's new global tariff and the generic drug tariff from 2028 — that could reignite goods inflation. Lucas: That's a real wildcard. The Fed is probably watching that closely, but for now, they see the current data as validating their patience. The question is: how long can this Goldilocks economy last? Luna: Especially with the World Cup distorting spending data — bars and restaurants got a boost, but the Fed's Beige Book noted consumers are flashing warning signs. So the next few months will be telling. Lucas: Right. If jobless claims stay this low and inflation continues to edge down, the Fed might stay on hold through year-end. But if the data flips — say, core PCE starts rising again — all bets are off. Luna: It feels like we're in a waiting game. The market wants cuts, but the economy isn't cooperating. Lucas: Exactly. And that tension is what makes this moment so interesting. The 187,000 claims number is a reminder that the labor market is still resilient — but it's not the threat it once was. For now, the Fed is comfortable watching and waiting.