Big Picture : Fed Policy

US macro variables chart pack and my Outlook

US Employment

Fed Policy

Growth Evolution

My Thoughts

Fed Chairman Powell would like to start easing US monetary policy at its upcoming September meeting if he were in sole control of the board.

The average of the preceding three months payroll data has now dropped below 200,000 (177k according to my calculations using recent revisions). This pace of job creation is insufficient in order to keep the unemployment rate from rising, which has been ticking higher at a pace of roughly 0.1%/month. US labour force dynamics require a production of at least 250,000 jobs on a monthly basis in order to balance the market and keep the unemployment rate at bay.

As the pace drops the UE rate will go up, calling into question the Fed’s adherence towards its dual mandate of both job creation and inflation.

On the inflation front, lower monthly Core Pce prints need to be sustained in order to return inflation safely back to 2% in the next 6-9 months. As can be seen from the Core Pce chart attached above, there are now 2 paths for annual Core pce if we look out to Q1 of 2025. One path gets us below 2% by March of 2025 if we assume monthly Core Pce prints of 0.1%. The other path keeps inflation sticky around 2.4% if we assume prints of 0.2%. Therefore June, July and August’s inflation reports are now key in determining which path inflation will actually take. (Note the Chairman would like to have delivered his first rate cut at least 6 months in advance of when inflation actually hits 2%).

So if we now assume that the next 3 months of core inflation data come in benign as they did in May, inflation should hit target by March of 2025 which would mean September would be a live meeting for the first rate cut by the Fed, all else being equal.

The market at the moment is almost perfectly priced for this outcome

The Chairman would like to signal the September rate cut at his upcoming July meeting but he will only be able to do so if both June’s Core Pce number and US Gdp data for the 2nd quarter continue to show signs of weakening demand.

So for me, July 25, 26 and July 31 are now key dates as far as the US macro outlook and Fed Policy are concerned (see below).

July 25: Advanced Q2 US GDP Release

July 26: Core PCE report for June

July 31 : Fed Monetary Policy Meeting

Let’s see what happens:) As always, I shall keep you posted here at Purity Macro.

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Disclaimer

The information provided in this post is for general use only and does not constitute a solicitation for investment. It should not be construed as professional financial advice. Seek independent professional consultation before making an investment decision.