In my note yesterday, we talked about the likelihood of a negative GDP number and a soft inflation number in this morning's data.
We got both.
So, with this morning's inflation number, the Fed now has rates set at 200 basis points above the rate of inflation — a historically tight monetary policy stance. By design, that puts downward pressure on an economy that just contracted in the quarter.
Next up is Friday's jobs report — where a negative surprise is quite possible. Remember, government job cuts from the past three months still haven't shown up in the monthly labor data.
Of course, a weak jobs number would compound a deteriorating economic picture. And on that front, we got a warning shot this morning from a soft ADP private payrolls report.
So, with the above in mind, the Fed meets next week.
Let's revisit what Jerome Powell said in March about conditions for adjusting policy, or not:
"If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly."
Also, remember the Fed has been telling us for the past year that signs of "cracks" in the labor market would be a condition to "react" (i.e. with rate cuts).