Federal Reserve Chairman Jerome Powell told the Senate banking panel on Tuesday that the labor market "appears to be fully back in balance," lowering the bar for interest-rate cuts. The S&P 500 closed slightly higher as investors turned their focus to Thursday's consumer price index release.
Fed Chair Powell Turns More Dovish
Powell's opening remarks characterized the labor market as still being "strong," but no longer overheated. That status-quo description was something of a let-down after Friday's soft June jobs report. But Powell shifted his tone in his back-and-forth with lawmakers.
Powell has been saying for a while that the labor market has cooled. But this time he said it "has cooled really significantly across so many measures."
Since late 2022, Powell has emphasized inflation in nonhousing services as a key to the interest-rate outlook, because wages make up a high percentage of costs for service businesses from health care, to haircuts, to hospitality. But Powell said on Tuesday that the labor market is "not a source of broad inflationary pressures for the economy now."
Powell's testimony noted the rise in the unemployment rate, but only to "a low level of 4.1% in June."
Still, the jobless rate is at its highest level since late 2021 and even higher than the Fed's 4% projection for the end of 2024. Unemployment is rising because the number of people entering or reentering the labor force has overtaken new job creation. Meanwhile, 12-month wage growth has fallen to 3.9%, the lowest since mid-2021.
The June jobs report, which included big downward revisions to hiring gains in April and May, showed that net hiring by private firms has slowed to a monthly average of 146,666 in Q2, the least since the pandemic shutdown.
Fed Rate-Cut Outlook
Powell has said that unwarranted weakening of the labor market would create more urgency to lower the Fed's key interest rate from restrictive levels. His assessment that the labor market is still "strong" makes clear that we're not there. Yet his view that the labor market is fully balanced between supply of and demand for workers suggests that further cooling of the labor market could hasten Fed rate-cutting.
As of Wednesday morning, markets are pricing in 75% odds of a Fed rate cut at the Sept. 18 meeting and 76% odds of two quarter-point rate cuts before the end of 2024. Both were little changed from before Powell's testimony.
CPI Inflation
Powell's prepared remarks were pretty restrained about progress on inflation. Yet he offered this upbeat view at a European Central Bank forum last week: "We are getting back on a disinflationary path."
The next big data point comes on Thursday at 8:30 a.m., with release of the June CPI. Economists expect a 0.1% overall CPI increase on the month, with a 0.2% rise in the core CPI, which strips out food and energy.
But it could go either way. Deutsche Bank expects a 0.25% rise in the core CPI as May's decline in transportation services prices could lead to a rebound in June. However, Nomura predicts a tame 0.135% core CPI increase, thanks to lower prices for hotel and motel stays, as well as lower airfares.
S&P 500
The S&P 500 rose 0.1% in Tuesday stock market action, extending its winning streak to six sessions and chalking up its 36th record high this year. The S&P 500 has climbed 17% in 2024.
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