This Thursday, investors will see the latest CPI inflation data, and Powell, who is "data-dependent," will undoubtedly try his best to avoid surprises for investors at hearings on Tuesday and Wednesday when assessing the Fed's dual goals of full employment and stable prices.
But the latest economic data may be pushing the Federal Reserve toward its first rate cut since 2019, especially after the unexpectedly weak unemployment rate on Friday.
The market currently expects the Federal Reserve to keep its policy unchanged at its July interest rate meeting in three weeks, but the possibility of a rate cut in September is increasing, now rising to 72%, up from 47% a month ago.
Last week, Powell was asked directly whether the Fed might cut interest rates in September, and he declined to answer, noting that the Fed could be patient given that the strong job market is still gradually slowing.
But just days after that event, the Bureau of Labor Statistics reported on Friday that the U.S. unemployment rate rose to 4.1% in June, surprising Wall Street, which had expected it to remain at 4%. Although the gap is small, the unemployment rate is close to triggering a recession indicator known as Sam's Rule.
Sam's rule, which shows an economy is in recession when the three-month average of the unemployment rate is half a percentage point above its 12-month low, is designed to detect an acceleration in job losses and has successfully predicted nine U.S. recessions since 1970.
As of June, the reading is now 0.43 percentage points. At the September meeting, there will be two more employment data releases (July and August). If one of the data shows that the unemployment rate reaches or exceeds 4.2%, then the Sam rule will be triggered.
Even if the SAM rule were triggered, the Fed would still have ample reasons not to act, especially in an election year.
On top of that, Powell recently made it clear that he still wants to see more evidence that inflation can fall sustainably toward its 2% target. So if Thursday's CPI number rises sharply, it's reasonable to expect that the odds of a September rate cut by the Fed will drop significantly to near zero.
However, Sam, a former Federal Reserve economist who created the rule, expressed doubts about its effectiveness in a world that is still normalizing from high unemployment during the COVID-19 pandemic.
Sam herself has been urging the Fed to act quickly, and in an interview, she said a recession is a real risk, although it is not her baseline forecast. She said, "The worst possible outcome for the Fed at this time is to trigger an unnecessary recession."
Depending on the employment data released in a month or two, when the market is likely to be fed a series of news and reports declaring that a US recession is imminent and that the Federal Reserve's focus has shifted from inflation and stable prices to employment and maximum employment, the risks to the US economy seem to be increasing, just like the risks before a plane lands.
The article is forwarded from: Jinshi Data
