Stephen Miller
It doesn’t seem that long ago that markets were sifting through the entrails of the Federal Reserve’s (Fed) last policy decision and subsequent press conference from Fed Chair Powell.
That meeting decided on a 50 basis point (bp) policy rate cut over the option of a smaller 25 bp increment.
The decision to opt for the higher quantum of reduction reflected a view that the inflation risks have diminished while labour market conditions, while consistent with a “soft landing”, were at some risk of deterioration.
Chairman Powell was careful, however, to characterise the labour market as still fundamentally healthy, casting the Fed decision to cut 50bps as preserving a strong labour market rather than reacting to one that was in a state of weakness.
That characterisation might have been designed to prevent markets anticipating “too much” easing.
Nevertheless, markets have at various times since that last meeting heavily romanced the notion of a further 50bp cut when the Fed next meets to consider policy settings on 6-7 November.
Powell continues to publicly downplay the prospects of a 50bp reduction at that meeting.
Earlier this week he noted that the Fed’s policy rate setting committee ‘is not a committee that feels like it’s in a hurry to cut rates quickly.’
Again, in making those remarks, my sense is that Powell wasn’t ruling out a 50bp rate cut, but was seeking to cool the bond market’s ardour in pricing such an eventuality.
Certainly, if the labour market continues to show signs of rapid cooling there is every prospect that the Fed will cut the policy rate by a further 50bps in November.
But Chairman Powell doesn’t want markets to arrive at that place before the data. Were it do so, without any push-back from the Fed, it might be that a 50bp policy rate reduction losses some of its “announcement” potency.
For the time being it suits the Fed to have at least some ambiguity around the prospects for a 50bp cut. Hence, the current communication tack curbing the markets’ enthusiasm for such a 50bp reduction.
Given the Fed’s more pronounced emphasis on the labour market side of its mandate, the next key staging post will be Friday’s September non-farm payrolls data.
Recent payrolls data has painted a picture of a cooling labour market.
Having said that, indicators released so far this week are indicative of some labour market resilience.
The consensus estimates for September non-farm payrolls is for an increase in employment of around 140k and an unchanged unemployment rate at 4.2 per cent.
The August Job Openings and Labour Turnover Survey (JOLTS) report released on Tuesday was stronger than anticipated and while maybe not inconsistent with some ongoing cooling in the US labour market they remain some way from signalling any worrying dislocation.
The ADP June payrolls report released overnight were also a little better than anticipated with employment growing by 143k (versus an expected 125k). That is a far from worrisome picture of the labour market. While a reasonable enough indicator in and of itself, its record in foreshadowing month-to-month movements in the Bureau of Labor Statistics payrolls measure is at best mixed.
An outcome close to expectations for the aforementioned components of the non-farm payrolls report probably leaves the Fed publicly still curbing market enthusiasm for a 50bp cut.
An increase in the unemployment rate beyond 4.2 per cent or softer than anticipated employment growth will make that job harder, and even then, there is one more non-farm payrolls release before the next Fed meeting.