The Federal Reserve is expected to announce another quarter-point cut to its key interest rate Wednesday, an effort to boost what appears to some to be a steady but cooling economy.
Yet there remains debate about the extent of that cooling — or even whether it is happening at all.
Some of the economic data closely watched by economists paints a rosy picture. Inflation remains far below its post-pandemic highs, though the Bureau of Labor Statistics reported last week that the 12-month Consumer Price Index (the most-watched inflation indicator) had climbed 2.7% for the month of November — above the 2.6% pace seen the previous month.
Consumers seem unfazed. On Tuesday, the Census Bureau reported retail sales had climbed 0.7% in the same month, ahead of forecasts of 0.6%, while the October figure was revised up to 0.5%, from 0.4%
Those data points suggest the economy remains on relatively firm footing, but there are some warning signs flashing about underlying weaknesses — something that would justify the looser monetary policy the Fed, not to mention President-elect Donald Trump, has been seeking.
Most worrisome is the labor market, where job growth has largely become concentrated in sectors like health care and state and local government. Those sectors tend to say little about where we are in the business cycle.
Meanwhile, the pace of job gains in sectors that usually point to continued growth, like manufacturing, business and professional services, has virtually flatlined.
Overall, hiring rates have plummeted, while job openings continue to fall.
Finally, after an incredible bull run for most of 2024, some stock indices are pulling back from all-time highs. The Dow Jones Industrial Average has been in the midst of a nine-day losing streak, its worst multiday performance since the 1970s.
Right now, market participants overwhelmingly believe that after the Fed announces its quarter-point cut for December, it will “pause” and hold rates steady at its January meeting in order to assess how overall financial conditions are faring.
For the most part, analysts remain relatively sanguine about the current state of affairs. A new Bank of America survey finds the Fed still appears likely to pull off a “soft landing” for the U.S. economy in which unemployment and inflation remain relatively low.
Yet if anything, according to Goldman Sachs analysts, inflation was expected to have fallen even more by now, something that would have come at the expense of slightly higher unemployment.
“The unemployment rate is no longer rising as quickly” as it was earlier this fall, those analysts said in a chart accompanying a recent note to clients. Still, they said, “it is too soon to conclude that the broader labor market data have convincingly stabilized.”
Even with a still-shaky labor market, Federal Reserve officials have signaled they may want to slow the pace of cuts soon — not only in response to stickier inflation, but also given uncertainty about the incoming Trump administration’s tariff policies.
To illustrate the Fed’s thinking, the Goldman analysts pointed to a speech this month by Beth Hammack, president of the Federal Reserve Bank of Cleveland, laying out the state of play.
“Resilient growth, a healthy labor market, and still-elevated inflation suggest to me that it remains appropriate to maintain a modestly restrictive stance for monetary policy for some time,” Hammack said. “Such a policy stance will help to sustainably return inflation all the way back to 2 percent in a timely fashion.”
There has also been a broader rethinking about whether interest rates need to be higher in general given structural changes that may be occurring in the economy that have led to faster growth, like large fiscal deficits and elevated productivity growth.
Whereas the 2008 financial crash set the stage for more than a decade of low interest rates, Hammack said, “some of the forces that appeared to be holding down the neutral rate following the Global Financial Crisis may have finally run their course or reversed.”
Investor and economist sentiment has also become more unsure about what impact the Trump administration will have on the economy. In particular, fears about tariffs increasing prices have become widespread.
“When it rains, it rains on everybody,” Gary Millerchip, the CFO of Costco, said on the company’s most recent earnings call.
Still, the base case appears to be relatively smooth sailing, thanks mostly to Trump’s pro-business agenda. The Bank of America survey not only showed an eight-month high of 33% of respondents expecting the economy to continue to grow at a steady clip, but only 6% expect a recessionary scenario — a six-month low. Meanwhile, overall investor sentiment remains “super bullish,” with funding allocation into stocks at highs and cash at lows — on hopes for ongoing consumption and cheaper financing after Trump takes office.
Ironically, when sentiment gets to this level, it is usually a sell signal, Bank of America said in the note.
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