Rising markets want another rate cut – and a repeat dose – at the next meeting, Nov. 6-7. It is the Federal Reserve that holds back the enthusiasm. It will be the labor market that has the last word.
Nobody can act distracted. The FED played hard with its first rate cut in four years. “Half a point or a quarter of a point, either of the two alternatives was reasonable”says Neel Kashkari, head of the Minneapolis Fed. But the half-point kick sends a strong message. The risks of a weakening labor market had to be emphasized, says Governor Lisa Cook. “I supported that decision with all my heart.” With similar vehemence, another governor, Michelle Bowman, allowed herself to dissent. He argued unsuccessfully for a quarter point. “The inflation target has not yet been met,” He maintains, and it is so. It is the first formal disagreement in an internal vote since 2022. And no governor had carried it out in the last 19 years.
But the balance of risks no longer favors zeal against inflation but the threats that hover over full employment. The decision itself – and its sloppy leak in the middle of the information ban – posed an additional danger. If everything is fine, why do they rush the double dose? Markets are refractory to risk and even more so to the unknown. What problem do we have, Houston? A week passed and none. There was also no boomerang effect. It is the other way around, the rising markets want another cut – and that the dose be repeated – at the next meeting, on November 6 and 7. It is the FED that is holding back the enthusiasm. Counterpoint is also a constructive signal.
What does consumer confidence indicate?
How extreme did the FED have to go to convince that nothing was broken? He simply let the data speak for itself. The third review of GDP confirmed its growth at 3% in the second quarter. And it raised the expansion of its counterpart in terms of income, Gross Domestic Income, from 1.3% to 3.4%. And what to say about the current quarter? The real-time forecast calculated by the Atlanta FED, a volatile predictor if there is one, detects a slight acceleration to 3.1%. If employment cools, what flies is productivity. Even so, There is a thorn in the side. Consumer confidence, measured by The Conference Board, suffered the sharpest drop since 2021.
It is perceived as increasingly difficult to find a job (and those who keep it fear losing it). The FED’s half point should be seen as a tranquilizer delivered on time. But, although labor demand is declining, there is no sign of an increase in layoffs. Initial claims for unemployment benefits, which caused a stir weeks ago, fell to their lowest level since May. Taking raw figures, without removing seasonality, they are not many more than a year ago. And the consumer is a special subject. When he answered the University of Michigan survey, his confidence already turned around and rose for the third consecutive month. Now, when it comes to spending, there are no half measures. Private consumption grew 2.8% from March to June. And it continued to rise in July and August. As things stand, it is currently around a rate of 3.3%.
The economy is chugging vigorously. And inflation is descending quickly. The personal consumption deflator rose 0.1% in August. The last twelve months it rose only 2.2%. The dissident Bowman is right, but less and less so. In the last three months, prices advanced at an annualized speed of 1.5%, half a point below the goal. And although some pressures loomed sharply in September, as had not happened since March, inflation is converging towards its objective faster than expected. Thus, the FED can take liberties that it did not dream of three months ago. Like half-point baptism.
The FED is not alone
The FED is not alone in its efforts. And it all adds up. The central banks of Switzerland and Canada triggered their third rate cut this week. The ECB could do it on October 17, without waiting for December. Inflation is also melting in the eurozone: France, 1.5%: Spain, 1.7%. And monetary policy, although it is determined based on the circumstances of each country or region, is global in its effects. Hence, the surprising China syndrome. No one took better advantage of the FED’s half-point reduction than the Beijing authorities in the antipodes. First the People’s Bank, with an artillery of rate cuts that was unthinkable if Powell did not move generously first. The fear of the yuan’s collapse was the obstacle that the FED removed. After, Immediately, the Politburo coupled fiscal policy in the same expansive direction. It is the largest stimulus package since the pandemic. And it has already caused miracles: it resurrected the Chinese stock markets (and other zombies of the moment such as grains). Shanghai rose 12.81% in the week. Shenzhen, 17.83%. Donald Trump, who considers himself the political victim of the middle ground, will take it badly when you tell him.
Will it be necessary to trigger another extra large drop in November? The markets ask for it, but they don’t need it. They ask for it from the top because they know that the FED has plenty of ammunition. It will be the labor market that has the last word. And all of Powell’s attention. Rising unemployment is uncomfortable, but the vigor with which employment grows is the key variable. This Friday the September jobs report will give you a clue.
Source: Ambito
