Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why the Fed Is Stuck at 3.63 Percent
Transcript
- Lucas: So the federal funds rate has been sitting at 3.63 percent for a month now — flat since the June FOMC meeting. And the really interesting thing is that nothing in the data since then has made a clear case for moving it. Luna: Right — the unemployment rate is holding at 4.3 percent, core PCE is at 130.1, up from 129.67, and the yield curve is still inverted. It’s like the economy is sending a dozen different signals at once. Lucas: Exactly. And I think that’s what makes this moment so tricky for the Fed. They've got inflation that's still sticky — core PCE is running above their target — but the labor market isn't overheating either. Job openings actually ticked up a bit to 7.594 million in May, but that's still well below the peaks of 2022. Luna: And then you've got the ADP report from yesterday — private payrolls added just 98,000 in June, which was below expectations. That's the kind of number that makes you wonder if the economy is starting to cool. Lucas: Yeah, and if you look at the bond market, the 10-year breakeven inflation rate dropped to 2.23 percent. That's actually down from 2.24 a day earlier. So bond traders are pricing in slightly less inflation risk, even though the actual inflation data hasn't really budged. Luna: Honestly, if walking through the economy with us has made something click for you — even one episode — that's exactly the kind of thing listener support helps keep going. We keep the show ad-free, and it's just a link: buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small thing, but it genuinely makes a difference. And we're not asking for much — if today's conversation was worth a coffee to you, that's the link. Luna: Alright, so back to the Fed's dilemma. The yield curve is still inverted — the 2-year is at 3.70 percent, the 10-year at 4.47. That inversion has been going on for over a year now, and historically that's been a recession signal. Lucas: But here's the thing — the economy keeps defying that signal. Real GDP growth annualized came in at 2.1 percent for the first quarter, up from just 0.5 percent in Q4 last year. So we're actually seeing acceleration, not contraction. Luna: So the bond market is screaming recession, but the GDP data is saying expansion. That puts the Fed in a tough spot. Lucas: Exactly. If they cut rates now and inflation reaccelerates, they lose credibility. If they hold steady and the economy really does slow, they get blamed for being too tight. So they're kind of stuck. Luna: And the market is already pricing in a cut in September. But the Fed hasn't signaled anything like that. The fed funds rate is still at 3.63, and the interest on reserve balances is at 3.65 — they're keeping pressure on. Lucas: Right. And I think that's the key tension right now. The market expects the Fed to ease because they see the yield curve inversion and the mixed jobs data. But the Fed sees core PCE at 130.1 and says, 'not yet.' Luna: Let's talk about what we might learn from Friday's jobs report. Goldman Sachs is estimating the World Cup could boost June payrolls by 40,000. That's a weird one-off factor. Lucas: Yeah, that's a really interesting wrinkle. The World Cup is this summer, and there's clearly some temporary hiring around that — hospitality, security, logistics. But if you strip that out, the underlying trend might be softer than the headline number suggests. Luna: And the ADP number already pointed to a slowdown. 98,000 private payrolls — that's below the 12-month average of around 150,000. So we could see a headline that looks decent because of the World Cup, but the details might tell a different story. Lucas: Exactly. And if the unemployment rate ticks up from 4.3 percent — even to 4.4 — that could shift the narrative pretty quickly. The Fed has been watching the labor market closely for any sign of weakness. Luna: But initial jobless claims came in at 215,000 for the week ending June 20th — that's down from 227,000. So layoffs aren't accelerating. That's another data point that says 'steady as she goes.' Lucas: Right. So you've got low claims, decent GDP growth, but sticky inflation and a yield curve that's screaming trouble. It's no wonder the Fed is in wait and see mode. Luna: And the 10-year Treasury yield actually fell a bit — it's at 4.47 percent, down half a percent over the last five days. That's bond traders betting on a slowdown, not on higher inflation. Lucas: Yeah, the 10-year is being driven more by growth expectations than inflation fears right now. The breakeven rate dropping confirms that. So the bond market is essentially saying: 'we think the economy is going to cool, and inflation will come down on its own.' Luna: Which would argue for a rate cut. But the Fed is saying, 'we need to see more evidence.' And they have the luxury of waiting because inflation isn't falling quickly. Lucas: Exactly. And I think that's the bottom line for this episode: the Fed is stuck because the data is contradictory. They're not going to cut until they're sure inflation is sustainably heading to 2 percent, and they're not going to hike because the labor market is showing some cracks. Luna: So the most likely outcome is that they hold steady through the summer, maybe into the fall, and let the data clarify. That's the boring but responsible play. Lucas: Boring but responsible — I think that's the Fed's motto for 2026. And honestly, after the whiplash of 2022 and 2023, boring might be exactly what the economy needs. Luna: Alright, we'll see what Friday brings. Thanks for listening to The Macro Memo.