Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / How the June Jobs Miss Changes the Feds Rate Path
Transcript
- Lucas: So the June jobs report came out this morning — 57,000 new payrolls. That is well below the consensus estimate around 190,000. And the unemployment rate held at 4.2 percent, which sounds stable until you look under the hood. Luna: Under the hood being a labor force participation rate that fell to its lowest level in 50 years, outside of the Covid period. That's the headline that jumped out at me. Lucas: Exactly. The participation drop is actually the bigger story here. Because the unemployment rate didn't rise — it held steady — but it held steady because people left the labor force entirely. The share of working-age Americans either employed or actively looking for work has been sliding for months, and this report accelerates that trend. If walking through the economy with us has made something click, by the way, listener support is what keeps this show ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. Just a low-key mention — now back to the numbers. Luna: Yeah, and it's worth noting that the participation rate drop isn't just a seasonal blip. The prime-age participation rate — 25 to 54 — also ticked down. That's the cohort the Fed watches most closely. Lucas: Right. So you have two conflicting signals in one report: hiring is slowing sharply, but the unemployment rate isn't rising because the denominator — the labor force — is shrinking. For the Fed, that complicates the read on the labor market. Chair Powell has said they want to see the labor market cool, but they want it to cool through slower hiring, not through people dropping out. Luna: And dropping out at this rate suggests something structural, not just cyclical. People aren't temporarily discouraged — they're leaving for good. Early retirement, disability, caregiving responsibilities. The kind of trends that don't reverse when rates come down. Lucas: That's exactly the concern. The Fed has a dual mandate — maximum employment and price stability. On the inflation side, core PCE is still running at 3.4 percent year-over-year as of May, above the 2 percent target. So the Fed is in a bind: the labor market is weakening in a way that normally would argue for rate cuts, but inflation hasn't come down enough to give them cover. Luna: Let's talk about the ADP number from yesterday, because it adds context. Private payrolls came in at 98,000 in June, also below expectations. So the miss in the official report wasn't a total surprise. Lucas: No, and Goldman had actually estimated the World Cup might add 40,000 jobs to the June count — mostly hospitality and event-related hiring. If true, the underlying organic hiring might have been even weaker. Take out that potential boost and you're looking at maybe 17,000 net new jobs. Luna: Oof. That's essentially flat. And yet the Fed's last Summary of Economic Projections from June had the unemployment rate ending 2026 at 4.0 percent. We're at 4.2 percent already, with half the year still to go. Lucas: Which means the Fed's forecast is already stale. The question is whether the FOMC responds at the July meeting. Right now the fed funds rate is at 3.63 percent, where it's been since the last cut. Markets are pricing in about a 40 percent chance of a cut in July, and this jobs report probably pushes that higher. Luna: But if they cut, they risk sending a signal that they're more worried about growth than inflation. And inflation expectations — the 10-year breakeven is at 2.23 percent, down slightly but still above the Fed's comfort zone. Lucas: Right, breakevens have been stubbornly around that 2.2 to 2.3 level for months. The bond market doesn't think inflation is vanquished. And we've got core services inflation — excluding housing — still running hot. So the hawks on the committee have ammunition to argue for patience. Luna: What's interesting is the internals of the jobs report. Industry breakdown — healthcare and government added jobs, as usual. But construction was flat. Manufacturing lost jobs. Retail trade lost jobs. That's not a broad-based slowdown, it's concentrated in goods-producing and interest rate sensitive sectors. Lucas: Which makes sense when you look at the yield curve. The 10-year Treasury is at 4.48 percent, the 2-year at 4.23 percent — that's a steeply inverted curve, but it's been inverting and dis-inverting for months. The inversion typically signals recession, but we've been in this zone for so long that it's hard to read. Luna: The small-cap index — the Russell 2000 — is down about 1 percent over the past five days, while the S&P 500 is up 1.1 percent. That divergence tells you markets are pricing in a slowdown that hits smaller companies harder, but big caps are riding on AI optimism and global demand. Lucas: Exactly. So the macro picture is genuinely confusing. Jobs are weak, but the stock market is near all-time highs. Inflation is above target but trending down slowly. Participation is falling, which tightens the labor supply and could put upward pressure on wages — average hourly earnings were up 4.1 percent year-over-year in this report, still elevated. Luna: Wage growth at 4.1 percent is not consistent with 2 percent inflation, especially in services. So the Fed can't just ignore that. Lucas: No, and that's why I think the July meeting is still a hold. Powell has been careful not to pre-commit. The data since the June meeting — this jobs report, plus the May PCE showing core at 3.4 percent — probably doesn't give them enough confidence to cut. But it does open the door for a more dovish statement, maybe acknowledging that the labor market is cooling faster than expected. Luna: So a signal, not a move. Language change rather than rate change. Lucas: Precisely. They could drop the reference to 'elevated inflation' or add a line about 'evolving risks' to the employment side. That would set up a September cut if the next two months of data confirm the trend. Luna: And what about the participation rate? Is there anything the Fed can do about that? I mean, monetary policy can't really fix people leaving the workforce. Lucas: It can't. That's the frustrating part. Lower rates might stimulate hiring, but if the pool of available workers is shrinking, you get wage inflation without much increase in employment. The Fed is stuck with the demographic and structural forces. The participation decline is a supply-side problem, and the Fed's tools are demand-side. Luna: So what do you think the odds are of a cut before the election? The next FOMC meetings are July, September, November, December. Lucas: I'd put September as the live meeting. If July's statement lays the groundwork, and if the August jobs report — which comes out in early September — shows another weak print, I think they go. The November meeting is too close to the election, and they'll want to avoid any perception of political influence. December is possible but late. Luna: And the data that would change that calculus? What would make them hold longer? Lucas: A reacceleration in inflation. If core PCE ticks up to 3.6 or 3.7 percent, all bets are off. Or a spike in oil prices — the Strait of Hormuz situation is still a wildcard. Energy costs feed into everything. But if inflation just muddles along at current levels and the labor market keeps softening, I think the Fed cuts. Luna: One more thing on the jobs report — the household survey showed a drop in employment of about 300,000. That's a much larger decline than the establishment survey's 57,000. The household survey is volatile, but it's worth noting. Lucas: Yeah, and the household survey is what the unemployment rate is based on. So the fact that it showed employment falling while the unemployment rate didn't rise is because the labor force shrank even more. That's the math. But it underscores the fragility. Luna: So bottom line for the Fed: the case for patience is getting weaker, but not gone yet. Lucas: I think that's right. The data is moving in a direction that argues for a pivot, but it hasn't moved far enough to force one. The next six weeks — July data, especially CPI and PCE prints — will be decisive. We'll be watching. Luna: And we'll be back after the July meeting to break it down.