The FOMC will convene for two days this week on Tuesday and Wednesday for policy deliberations. There seems to be consensus that the Fed will cut rates another 25 basis points following the recent 25 bp cut in July. The problem is that there is little by way of data that would indicate a cut at this time. Neither the output numbers nor labor market indicators suggest it.
Real GDP growth has remained fairly steady and many components show decent strength. While year-over-year growth has trended down a bit over the past year it is still averaging over 2% for the past few years.
Personal consumption expenditures (PCE) are solid, possibly reflecting confidence by consumers, with both durable and non-durable goods showing continued steady growth. There has been much talk about how the U.S. consumer is keeping the U.S. economy going with salutary impacts for our trading partners.
After taking a major hit during the Great Recession, investment has taken off and is now almost a half a trillion larger than before the recession.
Labor markets continue to show strength in pretty much every dimension. Both the headline unemployment rate and the U6 rate are at very low levels, falling below the levels seen in the run up to the Great Recession. Real average hourly earnings have picked up and the workweek has been fairly steady over the past several years.
There are more vacant jobs posted than unemployed individuals searching for them in every region of the country. Moreover, the Beveridge curve (plotting unemployment rates against job vacancies) has completely reversed itself since the Great Recession. Quit rates are pretty much as high as they have ever been since the JOLTS data began and layoffs and discharges at their lowest level.
So, what is driving all the negativity? Many have mentioned trade uncertainty. But the stock market seems to be defying those concerns. The question for the Fed is simply: Are the current trade fears large enough to justify another cut?
Nothing that we see in the current economic data suggests that another rate cut is called for. The Fed has promised “data driven” decisions so any decision to ease should be supported by the data that justifies it. The Taylor Rule suggests (of course it does not imply what the Fed should be doing) that the current level of rates is just right.
Is the Fed letting itself be stampeded by market expectations and Donald Trump’s tweets? It is a sad sad day if that is true.
