Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What the ADP Miss Number Means for the Fed
Transcript
- Lucas: So the ADP private payrolls number came out this morning — 98,000 jobs added in June. The consensus was around 140,000. That is a meaningful miss. Luna: Forty-thousand jobs short. And it's the third month in a row ADP has come in below expectations. Lucas: Right, and the market reaction was pretty muted, which I think tells you something. The S&P 500 is up about two percent on the week, the Nasdaq's up over three. Bonds actually rallied a bit — the ten-year yield dipped to 4.47 percent before settling. That suggests investors see this as a reason for the Fed to move toward a cut, not as a red flag. Luna: But the Fed hasn't been reacting to single data points. Chair Powell has been very explicit about wanting to see a sustained trend. Lucas: Exactly. And that's what makes this interesting. One miss isn't a trend, but three in a row starts to look like one. The ADP number alone doesn't decide policy — but it feeds into a broader picture that includes core PCE at 3.3 percent, which is still above target, and the ten-year break-even inflation rate at 2.24 percent. Luna: So what do you think the Fed makes of this? Are they worried about the labor market, or are they still focused on inflation? Lucas: I think they're in a tough spot. On one hand, the labor market is clearly cooling. ADP's 98,000 is below the pace needed to keep up with population growth. If you look at the service sector specifically — leisure and hospitality, education, healthcare — those have been the main drivers of job growth over the past year, and they're starting to slow. Luna: And that's exactly where the Fed's rate hikes would hit hardest. Services are rate-sensitive. Lucas: Right. But on the other hand, core PCE is still running at 3.3 percent year-over-year. That's down from its peak, but it's not at two percent. So the Fed has to weigh the risk of cutting too soon and reigniting inflation against the risk of keeping rates too high and causing unnecessary job losses. Luna: It's the classic dual mandate tension. Maximum employment versus price stability. Lucas: Exactly. And the market is pricing in about a 60 percent chance of a cut at the September FOMC meeting. But I think the Fed wants to see more data before committing. The next CPI print comes out next week, and the official jobs report is on Friday. Luna: So Friday's number is the real test. If the Bureau of Labor Statistics also shows a soft number, then the conversation shifts. Lucas: Absolutely. ADP and the BLS don't always align — ADP has a history of undercounting and overcounting. But when they both point in the same direction, the Fed pays attention. If we get another sub-100,000 print from BLS, I think the pressure to cut increases significantly. Luna: But you also have to consider that the economy isn't just the labor market. Consumer spending has been resilient, and the service sector is still expanding, even if hiring is slowing. Lucas: That's a really important point. The ISM services PMI last month was still in expansion territory. So it's not an economy that's falling off a cliff — it's an economy that's normalizing after a very hot post-pandemic period. The question is whether the Fed can engineer a soft landing where inflation comes down without a big jump in unemployment. Luna: And that's the million-dollar question. Or the multi trillion dollar question, I guess. Lucas: Honestly, this is the kind of episode we can only make because of a small group of listeners who chip in to keep it ad-free. If walking through the economy with us has made something click, you can find us at buy me a coffee dot com slash fexingo. No pressure — it's just what keeps this thing going without commercials. Luna: Yeah, and we really appreciate it. It allows us to dig into the numbers without having to worry about selling something. Lucas: So back to the dual mandate tension. What's interesting is that the Fed's own forecasts from June show GDP growth moderating to around two percent this year, and the unemployment rate ticking up to 4.2 percent by year-end. That's not a recession, but it's a slowdown. Luna: And if the labor market continues to soften, that forecast might be optimistic. Lucas: Right. The Fed's dot plot indicated one or two quarter-point cuts this year. But if the data keeps heading south, they might have to move sooner. The effective federal funds rate is at 3.63 percent right now. The market is pricing in a cut to 3.38 percent by December. Luna: So the market is already assuming the Fed will act. The question is whether the Fed will validate that assumption. Lucas: I think they will, but only if they see convincing evidence that inflation is staying on its downward path. The ten-year breakeven at 2.24 percent suggests the market expects inflation to average above two percent over the next decade. That's not alarming, but it's not fully anchored either. Luna: So the credibility of the inflation target is still at stake. Lucas: Exactly. And that's why the Fed is being so careful. They don't want to declare victory prematurely. The 1970s taught them that lesson the hard way. Luna: So if I'm a listener trying to figure out what this means for my portfolio or my job, what's the takeaway? Lucas: I'd say watch the BLS report on Friday. If it's weak, expect the rate-cut narrative to strengthen. But also watch the inflation data. If core PCE stays above three percent, the Fed will be hesitant. The next few months are going to be a real test of whether the economy can glide in for a soft landing or whether it's going to bump into something. Luna: And the ADP number today was a small piece of that puzzle, but an important one. Lucas: It adds to the picture. The question is whether the picture is one of a gradual cooldown or something more concerning. We'll know more by Friday afternoon. Luna: We'll be watching. Thanks for breaking it down. Lucas: Always a pleasure.