Unemployment Rate Is Now Fed's Undisputed Lodestar

  • Jerome Powell's Jackson Hole speech has turned Sept. 6 and Sept. 18 into the two most important dates for U.S. monetary policy in years, as events on both days center on the Fed's new guiding light: the unemployment rate. The first marks the release of the August non-farm payrolls report, and the second will see the Fed's much-anticipated interest rate decision and, just as crucially, its updated Summary of Economic Projections (SEP).
  • Powell essentially made two pivots in Jackson Hole. The first, as expected, is his clear signaling that a rate cut is forthcoming. The second, perhaps less anticipated, is his equally clear emphasis that unemployment, not inflation, is now the number one determinant of upcoming policy decisions.
  • However, Powell's warning that the Fed does "not seek or welcome further cooling in labor market conditions" basically means the current unemployment rate of 4.3% – which is still fairly low by historical standards – is now a "line in the sand" that, if crossed, will likely trigger a policy response.
  • "The unemployment rate is now around 90% of the Fed's dual mandate, inflation is about 10%," said John Silvia, founder of Dynamic Economic Strategy, adding that Powell's pivot to unemployment from inflation is remarkable considering the economy isn't in recession.
  • There's more than one way of measuring the strength or otherwise of the labor market and, by extension, the economy. They include nominal job growth, the ebb and flow of the labor force, and one of the Fed's favorites since the COVID-19 pandemic: the JOLTS estimates of outsized quits and job openings. But for the public, markets at large and politicians, the unemployment rate offers the clearest picture of how well the labor market is holding up.
  • Market participants are firmly pricing in a rate cut at the Fed’s Sept. 18 meeting. Traders are currently pricing in a roughly 63.5% chance of a 25-basis-point rate cut next month, with 36.5% pricing in a 50-basis-point rate cut, according to the CME Group’s FedWatch Tool.

(Source: Reuters)