FOMC Statement and Market Reactions
Yields and Recession Risks
- Yield Curve Inversion: The 2/10 yield curve has inverted further to -25 basis points, indicating potential recession risks as the Fed balances inflation and employment concerns.
- Fed’s Stance: No support for a September rate cut was expected, but the removal of “highly attentive to inflation risks” shows a balanced approach to both jobs and inflation.
Economic Progress and Inflation
- Substantial Inflation Easing: Significant progress has been made towards achieving a balanced economy.
- GDP Growth: Excluding trade, the GDP growth rate is at 2.6%.
- Investment Trends: Equipment investment has increased, although housing investments stalled in Q2 after strong gains in Q1.
- Closer to Rate Reduction: The Fed is nearing a point where reducing policy rates could be appropriate, potentially as soon as the next meeting.
- September Cut Possibility: A September rate cut could be considered if upcoming jobs and inflation data meet expectations.
- Continued Progress: More positive data is needed, but the Fed is gaining confidence in the current economic trajectory.
Market Conditions and Fed Policy
- Normalization: The economy is normalizing, reminiscent of 2019 conditions, which were not inflationary.
- Rate Adjustments: The time to adjust policy rates is approaching as the economy shows broader progress beyond just goods.
- Headline Job Numbers: Job creation has slowed, but the labor market is normalizing with a 0.7% increase.
- Wage Trends: Wages are rising gradually, indicating a balanced labor market.
Unique Economic Situation
- Inflation Drivers: The current situation is unique due to inflation stemming from the shutdown, making traditional indicators like the inverted yield curve less predictive.
- Consensus-Driven Decisions: The Fed is consensus-driven, and there is growing support for rate adjustments soon.
- Job Growth: The economy added 122,000 jobs with a +5,000 revision, falling short of the 150,000 expectation.
- Employment Cost Index (ECI): ECI came in at 0.9% for the quarter (3.6% annualized), the second time under 1% since 2021, easing wage-price spiral fears.
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