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WILL LABOR MARKET DOWNTURN = 125 BPS IN RATE CUTS THIS YEAR?
Starting on Tuesday, Federal Reserve Chair Jerome Powell is to be subjected to his semi-annual congressional grilling, first by the Senate Banking Committee and the House Financial Services Committee takes its turn on Wednesday.
The stoic central bank leader is expected to sing the Fed's refrain: he's pleased with the progress of inflation, but more data to be convinced inflation is cooling down sustainably.
He'll get his wish for more data this week, with the Labor Department's Consumer and Producer price indexes (or CPI and PPI, respectively) in the offing.
But Ian Shepherdson, chief economist at Pantheon Macroeconomics, is of the mind that the Fed might very well be forced to prioritize the other half of its dual mandate, which, aside from price stability is reaching full employment.
The June jobs report released on Friday was something of a wolf in sheep's clothing; it beat the headline estimate but landed in the shadow of sharp, downward revisions to April and May data, which "erased the picture of recent resilience," Shepherdson writes in a .
Not only that, private job adds missed by a mile. Unemployment ticked higher.
"Fears of a labor market downturn will supplant inflation worries at the Fed," Shepherdson adds. "The FOMC longer will be able to breezily declare again that 'job gains have remained strong' at this month's meeting."
Further down the road, Pantheon expects high interest rates and dampening demand to move more businesses to reduce staffing costs.
Recent data shows mounting evidence of a softening labor market; continuing jobless claims have touched two-and-a-half-year highs, wage growth is cooling, hirings are slowing down, PMI employment indexes are in contraction, firings are inching higher.
Add to that, the fact that employment tends to be a lagging economic indicator and monetary policy changes generally take months to show up in the data.
"Mr. Powell’s semi-annual Testimony to Congress tomorrow provides the ideal opportunity for the Chair to express rising concern about the labor market and alert markets to the possibility of more decisive easing than they currently expect," Shepherdson says.
Pantheon Macroeconomics has forecast a 25 basis point rate cut in September, and has "penciled in" 50 bp cuts at the Fed's November and December meetings.
(Stephen Culp)
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