The Federal Reserve gave the financial market what it expected this week – no rate cut this time, but strong hints for a cut in September if the data supports a move. While the official press release was vague on the Fed’s next step, it did note that the committee’s focus is now equally attentive to risks on both sides of the Fed’s mandate - jobs and inflation, not just inflation. Federal Reserve Chair Jerome Powell elaborated on this point in his post-FOMC meeting press conference, noting it is a “rough balance” to achieve, but he believes they are headed in the right direction. A lot of progress has been made in bringing down inflation, especially in the second quarter, but more data needs to be seen for committee members to have complete confidence that inflation is headed to 2%. Powell believes the labor market is normalizing but will watch closely for any significant signs of weakness. The FOMC is very preoccupied with balancing the risks of moving too soon or too late, but believes they are on the right path.

Powell presented a compelling case for the Fed to begin cutting rates at the next FOMC meeting on September 18 and tried very hard to be noncommittal. The vote to leave rates unchanged this time was unanimous, but Powell said the committee had a “nice conversation” and seems to be getting close to the point of dialing back the restrictive policy. In Powell’s words, a rate cut “is on the table at the September meeting” if all the data supports it. The market has already priced in a September cut and possibly two more after that. Keep in mind, we still have two more rounds of inflation and job data to get through before the September meeting. The Fed remains data dependent, so as much as the Fed believes it can “afford to dial back restriction,” it is not a done deal yet.

Jobs – The July job report highlighted signs of a slowdown in hiring. The U.S added 114,000 jobs in June, much lower than expected and the smallest amount since December 2020. The unemployment rate rose to 4.3%, the fourth consecutive increase and the highest level since October 2021. Health care added the most jobs followed by construction and government. Information technology and professional services had the biggest losses of the five major industries losing workers. When combined with the recent JOLTS report, the weakness in the labor market is a slowdown in hiring rather than an increase in layoffs and firing. The positive notes in the job report, as far as the Fed is concerned, were an increase in labor force participation and a smaller rise in hourly earnings.

The Markets – The bond market couldn’t be happier with Powell and company this week. Treasury yields were 15 – 20 basis points lower a day after the FOMC meeting. In the two days since, yields are down an additional 20 basis points. The Dow initially surged over 400 points before falling more than 1,000 points in two days on weak economic news. The fed funds futures market quickly priced in a 114% chance for a cut in September, 70% chance for November and 103% chance for December. As of this writing, there is a 72% chance for a 50 basis point cut rather than the usual 25 basis points. The market’s consensus is the Fed is once again behind the curve and should step up the pace of rate cuts. One report does not make a trend, and while the Fed may be more nervous today, it will surely stick to its plan of watching incoming data before making any moves.