Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why the Fed Is Watching Softer Job Openings
Transcript
- Lucas: So the June JOLTS report landed this morning, and job openings dipped to 7.36 million, down from 7.54 million in May. That's a pretty noticeable pullback, and it comes at a time when the Fed's been holding rates steady at 3.63 percent. The market's been waiting for a reason to expect cuts, and this might be it — or might not. Luna: Right, because openings are still above pre-pandemic levels, but the trend is clearly downward. So why isn't the Fed jumping on this? Lucas: Well, that's the million-dollar question. Warsh has been pretty clear that he's watching the labor market for signs of overheating, not just cooling. The unemployment rate ticked down to 4.2 percent, payrolls are still growing — 158,984 thousand in June, up from 158,927 the month before. So the labor market is still tight in the aggregate, even if openings are softening. Luna: But isn't the decline in openings a classic sign that demand for workers is fading? Lucas: It can be, but you have to look at the composition. What's really interesting is that the quits rate — the share of workers voluntarily leaving their jobs — has been drifting lower. That's typically a sign that workers are less confident about finding a better job elsewhere. And when quits go down, wage pressure tends to ease. Which is exactly what the Fed wants to see. Luna: So fewer quits, softer wage growth, and that helps bring down inflation? But core PCE is still sticky at 130.3, up slightly from last month. Lucas: Exactly. Core PCE is the Fed's preferred measure, and it's not falling as fast as they'd like. Even though headline CPI dipped to 332.6 from 334, the core is holding around 336. So the labor market is cooling, but it's not cooling enough to give the Fed confidence that inflation is sustainably heading to 2 percent. That's the crux. Luna: So they're stuck in this waiting pattern. Yeah, but let's talk about the Beveridge curve — you mentioned it earlier. That, like, the relationship between unemployment and job openings. How does that fit in? Lucas: So the Beveridge curve plots the unemployment rate against the vacancy rate. The Fed's been watching it closely because during this recovery, the curve shifted outward — meaning for any given unemployment rate, there are more vacancies than there used to be. That suggests a less efficient matching between workers and jobs. But now, as openings decline, we're starting to see movement along the curve, which is what you'd expect if the labor market is normalizing without a big spike in unemployment. Luna: That's actually a good sign. So they might be able to cool the labor market without a painful recession. But the market seems to be pricing that in — yields have dropped, with the ten-year down to 4.67 percent from 4.74 a week ago. And breakevens are at 2.22, so inflation expectations are pretty anchored. Lucas: Yeah, the bond market is clearly leaning toward a softer landing. But here's the tension: if the Fed cuts too soon and inflation reaccelerates, they lose credibility. If they wait too long, they risk tipping the economy into a downturn. And with Warsh at the helm, he's been pretty hawkish, emphasizing the need to see more progress before easing. Luna: That's a tough spot. I mean, we saw the ADP report yesterday showing private payrolls added just 44,000 in July — way below expectations. So the labor market is definitely losing momentum. Do you think Warsh is going to acknowledge that in his next speech? Lucas: He'll have to, but he'll frame it carefully. He's likely to say that while the labor market is cooling, it remains resilient, and that the Fed needs to see consistent evidence that inflation is on a sustainable path to 2 percent. That's the party line. But the data is starting to pile up — job openings down, quits down, ADP weak — and at some point, the Fed will have to respond. Luna: So if today was useful, the way we keep these episodes ad-free is listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. That's a nice way to keep the economics flowing. Lucas: Yeah, it really does help. And we appreciate every bit of it. Now back to the data — one number that stood out to me is the ratio of job openings to unemployed workers. That's been falling from its peak of over 2 to about 1.1 now. That's getting close to the pre-pandemic norm. And that ratio is a key indicator for the Fed. Luna: Right, that's a big deal. Because when that ratio gets back to around 1, the labor market is considered balanced. So we're almost there. But if it goes below 1, that's when you start to see upward pressure on unemployment. Lucas: Exactly. And right now, with unemployment at 4.2 percent, we're not seeing that yet. But the trend is your friend, as they say. If openings continue to fall, we could see that ratio dip below 1 by the end of the year. That would be a major signal for the Fed to consider cutting rates. Luna: So what would be the trigger for a cut? Is it a certain level of openings, or a certain unemployment rate? Lucas: I think it's more about the combination. Warsh has said he's data-dependent, so he'll look at the whole picture — inflation, wages, and the labor market. If core PCE continues to drift down and job openings keep falling while unemployment stays low, that's the sweet spot. But if unemployment starts to tick up, that changes the calculus. Luna: And the market is already pricing in about two cuts by the end of next year. But Warsh is not committing to anything. He's playing it close to the chest. Lucas: Right, and that's intentional. If he gives forward guidance too early, it could be misinterpreted. So he's letting the data speak. And right now, the data is telling a story of gradual cooling, but not collapsing. That's the 'soft landing' narrative, and it's still intact. Luna: But there are risks. We saw that manufacturing survey showing inflation worries worse than pandemic era. And China's factory activity contracting. So there are global headwinds too. Lucas: That's a good point. The Fed isn't just looking at domestic data. Global growth concerns can spill over. But for now, the domestic labor market is the focal point. The JOLTS data is a leading indicator, and it's pointing to a gradual normalization. That's something the Fed can work with. Luna: So bottom line: the Fed is on hold, but the labor market is cooling in a controlled way. And that gives them room to wait for inflation to come down further. Lucas: Exactly. And I think the key takeaway for listeners is to watch that openings to unemployed ratio. It's a simple, powerful metric. If it falls below one, that's a red flag. If it stabilizes around one, we're in a balanced labor market. That's the kind of thing you can mention to a friend. Luna: Yeah, that's a great takeaway. And I'll be watching the next JOLTS report to see if the trend continues. Thanks for breaking it down, Lucas. Lucas: Anytime. And remember, if you want to support the show, it's buy me a coffee dot com slash fexingo. We'll be back tomorrow with more macro insights.