Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why the Fed Holds Steady as Jobs Boom and Inflation Cools
Transcript
- Lucas: So the Fed is holding rates at 3.63 percent, and initial jobless claims just dropped to 187,000 — that’s the lowest since we started tracking this recovery. Unemployment ticked down to 4.2 percent. And yet headline CPI has been falling. The obvious question is why no cut? Luna: Right, because in the old playbook, falling inflation plus a strong job market usually means they’d hold or even hike, not cut. But they already cut twice this year. This feels like a pause. Lucas: Exactly. The Fed cut in March and April to get the funds rate from 4.25 down to 3.63. Since then, they’ve been on hold. And the data since April has been mixed — CPI down from 335 to 332.6, but core CPI basically flat at 336.1. Core PCE actually crept up to 130.1 from 129.67. Luna: So inflation isn’t dead, it’s just comatose. And the labor market is still running hot enough that they don’t want to reaccelerate demand. Lucas: That’s the logic. But here’s the part I find interesting: initial claims dropped 22,000 in a single week to 187,000. That’s a level associated with a very tight labor market. The unemployment rate is 4.2 percent, which is near full employment by any measure. And nonfarm payrolls added 57,000 jobs in the latest month — not a blowout, but steady. Luna: And yet GDP growth just rebounded to 2.1 percent annualized from a near stall at 0.5 percent. So the economy is gaining traction, not losing it. Lucas: Which brings us to the Fed’s dilemma: they want to ease, but the data keeps coming in too strong to justify it. And on top of that, import prices surprised to the upside last week — goods from China hit their highest level since 2008. That’s a supply-side risk that could push inflation back up. Luna: And then there’s the tariff story. Trump announced new global tariffs just this week, and the generic drug tariffs are delayed until 2028, but the threat alone might be enough to keep businesses from cutting prices aggressively. Lucas: All of this is probably why Kevin Warsh’s recent comments are getting so much attention. He’s been honing three key phrases that Fed watchers are parsing for clues. One is 'patient,' another is 'data-dependent,' and the third is 'inflation persistence.' That last one is key — he’s signaling that the Fed sees underlying price pressures that haven’t fully dissipated. Luna: So the pause isn’t just a pause — it’s a deliberate signal that they’re not done fighting inflation. Even if headline CPI is cooling, they’re worried about core and about the labor market adding to wage pressures. Lucas: Average hourly earnings hit $37.60, up from $37.51. That’s a 2.4 percent annualized gain — nothing crazy, but combined with tight supply chains and higher import costs, it’s enough to keep core PCE from falling to the Fed’s 2 percent target. The 10-year breakeven inflation rate is 2.26 percent, well above target. Luna: Honestly, if navigating this data with us has made something click, we’re glad. This show stays ad-free because of listeners who find value in it. If today’s episode was worth a coffee to you, you know the link — buy me a coffee dot com slash fexingo. Lucas: Absolutely. Back to the numbers — what’s the one thing that could force the Fed’s hand? If claims stay below 200,000 and GDP growth accelerates, they might have to start talking about a hike, not a cut. Luna: And if the import price spike from China sticks around, that could filter into consumer prices within a quarter or two. That’s exactly what they’re watching. Lucas: We also have JOLTS job openings ticking up to 7.594 million from 7.585 million. That’s a small increase, but it tells you employers are still hiring. The quits rate is probably steady. So the labor market isn’t just strong on the headline — it’s broad-based. Luna: Now, the housing market is still distorted by mortgage rates, but that’s a separate conversation. The key takeaway for this episode is that the Fed’s hold is rational given the data, but the risk of cutting too late or too early is real. Lucas: Let’s pull back to the bond market. The 10-year yield is at 4.68 percent, up about 2 percent in the last five days. The 2-year is at 3.81 percent. That’s a steep curve — not inverted anymore — which typically signals expectations of future growth and maybe some inflation premium. Luna: So the bond market is pricing in that the Fed won’t cut soon. The futures market shows a roughly 60 percent chance of a cut at the September meeting, but that’s down from 80 percent a month ago. Lucas: Right. And the Fed’s own dot plot from June showed two more cuts this year, but that was before the recent jobs and import price data. If I’m a Fed watcher, I’d say the next move is more likely a cut in December than September. Maybe even 2027. Luna: Which brings us back to Kevin Warsh’s phrasing. If he starts using the word 'patient' more often, that’s a clear signal that the hold is long-term. If he says 'data-dependent' with a hawkish tilt, that means they’re waiting for inflation to fall further. Lucas: Exactly. So for now, the economic narrative is: strong labor market, stubborn core inflation, rising import costs, and a Fed that is comfortable waiting. The next big data point will be the July jobs report in a couple of weeks. If claims stay low and payrolls come in above 150,000, the hold becomes even more entrenched. Luna: And if they do eventually cut, it’ll be because something breaks — either a big drop in consumer spending or a sudden jump in unemployment. But right now, nothing is breaking. Lucas: That’s the conclusion: the Fed is holding because the economy is in a 'goldilocks not quite' zone — too strong to cut, but too cool on inflation to hike. It’s a balancing act, and patience is the only play. Luna: Stay tuned for the next episode where we’ll dig into the World Cup’s lingering effect on service sector inflation. Lucas: See you then.