Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What Factory Job Cuts Tell the Fed About the Economy
Transcript
- Lucas: Factory job cuts in June are running at levels we haven't seen since the financial crisis and the early days of Covid. That's according to a new report from S&P Global out today — June 23, 2026. Luna: That jumped out at me too. We're talking about layoffs that rival 2008 and 2020. What's going on in manufacturing specifically? Lucas: Right. S&P's purchasing managers' index for manufacturing showed a sharp contraction in employment. The sub-index on jobs dropped to a level that historically has only been seen during deep recessions. And this isn't just one month — it's been trending down all spring. Luna: So the factory sector is clearly under stress. But the broader economy — services, consumer spending — still looks relatively solid. How does the Fed square that? Lucas: That's the puzzle. The effective federal funds rate is at 3.63 percent, and the Fed has been holding steady since the last cut in May. But if manufacturing is shedding jobs at a crisis pace, that argues for easier policy. On the other hand, core CPI is still running at 336.1 — up from 335.42 a month ago — so inflation isn't fully tamed. Luna: Right. The ten-year breakeven inflation rate is at 2.23 percent. That's above the Fed's 2 percent target, but not alarmingly so. It suggests the market expects inflation to settle a bit above target, not surge. Lucas: Exactly. So the bond market is telling you that inflation expectations are reasonably anchored. The real concern is the real economy — if factory layoffs spread to white-collar services, that's when the Fed might feel pressure to act more aggressively. Luna: And we've seen some headlines about job growth in Nevada, for example, but that seems concentrated in hospitality and construction — not manufacturing. So the picture is uneven. Lucas: Very uneven. The S&P report also noted that factory output fell for a third straight month. New orders are weak. Export demand is soft. It's a pretty classic inventory correction, but it's deeper than most forecasters expected. Luna: So what does this mean for the July FOMC meeting? Kevin Warsh is relatively new to the committee. Does he lean hawkish or dovish on this data? Lucas: Warsh has been described as pragmatic. He's not a pure inflation hawk — he's focused on financial stability too. But if factory job cuts persist, I think he'd be open to a cut. The question is whether the committee sees this as a cyclical slowdown or something more structural. Luna: If it's structural — say, due to automation or reshoring delays — then rate cuts won't fix it. That would be a tougher call. Lucas: You're spot on. And that's why the Fed is watching wage data closely. If factory workers who lose their jobs can't find new ones at similar pay, that could feed into broader economic weakness. But if they shift into services, the labor market stays tight and wage inflation stays sticky. Luna: And sticky wages keep the Fed cautious. So the factory job cuts alone might not trigger a cut — it's all about the spillover effects. Lucas: Speaking of which, if you're finding these connections useful — if walking through the economy with us has made something click — there's a simple way to support the show. It's ad-free and listener-supported. If today was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. Luna: Yeah, it really does help keep us going. No pressure, just appreciate you being here. Lucas: Anyway, back to the factory floor. One thing I'd flag is that the S&P report also highlighted a drop in input prices — that's actually good news for the Fed. It means supply chains are loosening, which could ease cost pressures down the line. Luna: So lower input costs might eventually show up in consumer prices. That would help the Fed's inflation fight without needing more rate hikes. Lucas: Exactly. But the timing is uncertain. If factory job cuts accelerate, the Fed might prioritize employment over inflation — especially if inflation expectations stay anchored around 2.2, 2.3 percent. Luna: Let's look at the broader market reaction. The S&P 500 is at 7,402, down 1.5 percent over the last five days. The Nasdaq is off more — 2.3 percent. So equities are pricing in some concern. Lucas: Right. But the ten-year Treasury yield is at 4.49 percent, up 1.3 percent over five days. That's a bit counterintuitive — normally bad economic news pushes yields down. So the bond market might be pricing in a different risk, like supply-chain disruptions from the Iran situation. Luna: There's a lot of crosscurrents. The Hormuz relief headlines from last week might have provided some near-term easing, but analysts say the economic toll is already baked in. Lucas: And then you have the Trump Iran deal claims — 'unconditional surrender' — all of that adds uncertainty. The Fed has to look through the noise and focus on the data. Luna: So back to the core question: with factory job cuts at crisis levels, is the Fed closer to a cut? Or does the mixed inflation picture keep them on hold? Lucas: My read is that the Fed is leaning toward a cut later this year, maybe September, but only if the weakness spreads beyond manufacturing. If services hold up, they'll wait. The May CPI print was still elevated — CPI at 334, up from 332.41 — so they need to see more progress. Luna: And the core PCE, which the Fed targets more closely, was at 129.6 in April, up from 129.32. So still creeping up. Not the direction they want. Lucas: Right. So the factory job cuts are a warning light, but not the only signal. The Fed is data-dependent, and right now the data is sending mixed messages. Luna: That's the frustrating part for markets — uncertainty. But at least the Fed is being transparent about their framework. Lucas: Yeah, and we'll get more clarity from the July meeting minutes and any speeches from Warsh or Powell in the interim. For now, the takeaway is: watch the factory sector. If layoffs spread to services, the conversation shifts quickly. Luna: And watch the breakeven rates. If they drop below 2 percent, the market is signaling recession risk, and the Fed will act. Lucas: Exactly. So we'll keep tracking those indicators. That's all for today — thanks for being here, and we'll see you next time.