A Week Full of Labor: Inflation Confidence Shifting the Fed's Focus
September 9, 2024
By Krista Biernbaum, CFP®, CIMA®
Investment Management OfficerThe theme for last week was “labor.” We started it by celebrating Labor Day on Monday, a holiday to celebrate the importance of working people in American history. In addition, we received various economic reports throughout the week giving us an update on the labor market. The week ended with Jobs Day on Friday. That was the focal point for the markets and the Federal Reserve.
The Fed's Dual Mandate
The Federal Reserve has a dual mandate of stable prices and maximum employment. The past two years were squarely focused on inflation as it reached a forty year high. During that time, the labor market remained strong. Now, that focus has shifted. As the Federal Reserve is gaining greater confidence inflation is moving towards its 2% objective, it is shifting focus to the health of the labor market. Why? Employment data have cooled this year with the unemployment rate rising above 4% and job openings declining. A normalization is welcomed but as Jerome Powell stated, “the Committee does not seek or welcome further cooling in labor market conditions.”
On Friday, the Bureau of Labor Statistics reported that the U.S. economy added 142,000 jobs in August. While this was an increase from July, it came in below expectations for the second straight month. In addition, the prior two months were revised lower. The bright spot in the report was the unemployment rate falling to 4.2%, its first decline in five months. The labor market is moderating but remains consistent with an economic slowdown and not a recession.
Interest Rate Drop Forecast
The jobs report gives the Federal Reserve the green light to start cutting interest rates at its next policy meeting on September 17-18. This expectation is priced into the market. The unknown is the magnitude of the first cut. Now that the Fed is in its blackout period, we won’t receive any additional commentary from policy members until after the conclusion of this meeting.
In the meantime, we can start to position for the next leg of this rate cycle. We know interest rates, particularly shorter-term ones, are headed lower. How far they fall will depend on inflation, the labor market, and the health of the U.S. economy. Only time will tell. Now remains an attractive time to reinvest that cash and maturing short-term Treasury bills into intermediate term high quality bonds. This will allow you to lock in current rates for years to come. If you have not reviewed your cash and fixed income positions, give us a call today. We want to make sure you are positioned for the next phase of interest rates. Your financial success matters to us.