The Federal Reserve has a dual mandate of maximizing employment while maintaining price stability. Since its inception, the Fed has adjusted monetary policy continuously as a counterweight to the natural capitalist economic cycles. At the same time, Congress has massively influenced the economy with fiscal inputs. The economy is also impacted by market factors like exports, imports, immigration and demographic changes.
Ideally, the sum of all Macroeconomic inputs would lead to a stable equilibrium with high employment and low inflation. Then we could all breathe a sigh of relief as the economy glided blissfully along like a sailboat on a sunny day.
Core PCE inflation dropped in the June report although inflation is still higher than the Fed’s 2% target. The Inflation, month-over-month percent change of both CPI and PCE were under 0.1% although the core change was over 0.2%. Is this approaching an equilibrium?
Unemployment is the other Fed mandate.
https://www.wsj.com/economy/jobs/even-a-slowly-cooling-labor-market-often-ends-with-a-recession-685e4361?mod=hp_lead_pos3
Even a Slowly Cooling Labor Market Often Ends With a Recession
The job market rarely rebalances painlessly; the Fed hopes this time is different
By Nick Timiraos, The Wall Street Journal, Updated June 30, 2024
…
Recently, the labor market has cooled, and indeed, looks like something close to normal. Unemployment has crept up from a half-century low of 3.4% a year ago to 4% in May, consistent with what economists consider full employment. The Labor Department releases June data Friday.
The question now is whether the labor market is in a sustainable equilibrium where unemployment settles out around 4% or keeps softening, resulting in recession — as historically has occurred when unemployment rises much more than it already has…
Job hiring and quitting rates are back to levels seen 10 and seven years ago, respectively, a sign fewer workers see the opportunity to jump to new, higher-paying jobs. Yet layoff rates remain low, meaning employers aren’t trying to shed labor.
That makes insured unemployment benefits the best early warning siren for a downturn. Initial claims have ticked up in recent weeks but are still below their year-earlier levels. If claims rise, the case for a rate cut could come together quickly… [end quote]
No, that’s not necessarily true. Fed Chair Powell stated clearly that bringing inflation to a stable 2% target might cause “some pain” (that is, higher unemployment). The FOMC has already anticipated rising unemployment and will not cut the fed funds rate if inflation is still higher than their target.
Initial unemployment claims are still very low. The recent rise is insignificant. I’ll keep an eye on it in the Control Panel in case it begins to look like 2007.
The options market is still predicting a fed funds cut in September and maybe another in December. But the options market has predicted many fed funds cuts that didn’t happen.
The rising trend in the stock index is masking inner weakness. The trade is risk-on but the Greed and Fear Index is in Fear. A few fast-rising stocks are driving the rise in the index while many others are lagging. This is especially clear in the NASDAQ where New Lows exceed New Highs. QQQ (market-weighted Naz index) is rising faster than QQQE (equal-weighted Naz index). Although VIX is low, such a narrow, overpriced market is vulnerable.
Treasury yields have stabilized. The yield curve is almost flat. Most commodities and USD have also stabilized.
Is the economy approaching equilibrium? If so, how long will this last?
The METAR for next week is sunny.
Wendy