So, the Federal Reserve decided to not cut interest rates at the meeting yesterday. We think they could have, but Jerome Powell thought it was better to wait for more clarity on the progress of inflation. On that front he did note that this year’s broad-based improvement in inflation data was much better than what he has seen over the last year. Additionally, he noted wage data was strong but at a much better level, and the labor market has softened to a point where he would not like to see further cooling.
We did receive a little more information on the labor market this morning with initial jobless claims data. The data surprised to the upside with weekly claims of 249k vs. an expected 236k. The number has been on the rise all year from a low in January of 190k and it is the highest number since June of 2023. Also, continuing claims continue to move higher and the year over year level of unit labor costs is at the lowest point since 2019.
Source: Department of Labor, as of 8/1/2024
The next Federal Reserve meeting is on September 18th. If the labor market continues on this path, it will look more and more like the Fed is behind the curve. The treasury market is already reacting in advance on the expectations of rate cuts. The 2-year yield has fallen from 5% to 4.25% over the last few months, opening a significant gap between it and the Fed funds rate. In September the market will get what it wants, a start of an easing cycle, and hopefully we don’t look back on this hold as a policy mistake.
Source: CNBC, as of 8/1/2024
Sean Dillon, CMT, CFTe
SVP, Investment Strategy
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