Remember the Second Part of the Dual Mandate?

July 11, 2024

If you have read any of my posts over the past two years, you are familiar with at least one part of the Federal Reserve Bank’s dual mandate – price stability (said another way, combat inflation). We have spent many a Fridays dissecting the latest inflation data and debating when (or if) prices would start to abate. (Good news – inflation is in fact falling – see more on that below)

However, the Federal Reserve has another main objective (which together with inflation they dub the “dual mandate”) and that is a strong labor market.

For several months now, the labor market portion of the dual mandate really hasn’t gotten too much airtime, mostly because of how strong it has been. This strength gave the Fed cover to keep the focus on inflation, as well as keep interest rates at elevated levels.

That seemed to change last week Friday when, in the middle of the 4th of July long weekend, the most recent jobs report was published, showing a mixed to weakening labor picture. Here are the notable items:

*206,000 new jobs were added in June, versus the 190,00 consensus. However, downward revisions to the prior two months were 111,000 jobs lost – a major correction.

*This increase represented a 1.7% year over year change, the slowest rate of annual change since March 2021

*The unemployment rate rose to 4.1%, up from this cycle’s low of 3.4% and also above the 36-month moving average. 

*Government accounted for most of the upside as private sector payrolls fell short (136,000 vs 160,000 expected)

*Payroll gains were concentrated in education/health services and government, while losses were shown in business and professional services.

*US Average hourly earnings increased 3.9% over last year, the lowest rate since May 2021

*Continuing jobless claims—which measure the number of individuals continuing to file for unemployment benefits—have risen to their highest since November 2021. This likely underscores the reduction in firms’ demand for labor and subsequent difficulty individuals are having in finding other jobs; the so-called “rehiring rate” is moving lower

All of this combined to reveal that the labor market is in fact slowing. This may sound like bad news on the face – but for the Fed, this is the type of cooling they need to see in the economy (along with lower levels of inflation) to feel confident in cutting rates.

Speaking of inflation, June’s CPI report was released yesterday The report revealed further progress being made on the inflation front. CPI rose 3% in the month, below the expectation of 3.1% and down from May’s increase of 3.3%. On a monthly basis, prices fell 0.1%.

With a weakening labor market and inflation continuing to decline, we may just be getting closer to the Fed’s first rate cut.

Onward we go,

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