We get the Fed's decision on monetary policy on Wednesday.
The market is pricing in a quarter point cut in each of the three remaining meetings this year.
If we look back at conditions this time last year, when the Fed surprised markets with a half point cut in its September meeting, inflation was running 2.3%, GDP was running 3%, and unemployment had ticked up to three-year highs at 4.2%.
The three months average on payrolls (job creation) had dipped below 100k for the first time since the depths of the covid lockdowns. Add to all of this, the BLS had just made the largest negative one-off adjustment to job growth (-818k) since 2009 (the depths of the financial crisis).
With the risks "balanced" between inflation and the labor market, the Fed decided to cut by 50 basis points — with the stock market on record highs.
Here's what Powell said about that decision when asked directly in the press conference: He said the annual revisions to jobs "suggest that the payroll report numbers that we're getting may be artificially high and will be revised down."
Fast forward to this week, and conditions heading into this Fed meeting look similar.
The stock market is on record highs. While inflation has ticked up a few tenths from last year this time, with PCE running 2.7%, inflation expectations are steady. GDP is running 3% and unemployment has ticked up to a new three-year high at 4.3%.
And this time, three-month average job creation is running below 100k — for four straight months. And the BLS just made the largest negative one-off adjustment to job growth (-911k) on record.
This time, instead of "balanced risks," Jerome Powell told us at Jackson Hole that the balance has "shifted," meaning the labor market risk now outweighs the inflation risk.
With that, the Fed has explicitly said that "cracks in the labor market" are a condition that warrants action.
When they moved 50 last year, Powell said the move should be taken "as a sign of [their] commitment not to get behind the curve."
He was talking about the job market.
And at that time, Atlanta Fed President Bostic said "if the labor market deteriorates" it's a reason "for a faster pace to neutral." Fed Governor Waller said he would support moving in 50s to get to "where they want to go," which is the neutral rate (which is at least 130 basis points lower than the current Fed Funds rate).
As we head into this Wednesday's meeting, Trump's new Fed appointee, Stephen Miran, was just confirmed by the Senate. He will not just be a vote, but a significant voice in the room.
Still, the market is pricing in almost no chance of a half point cut tomorrow.
