Federal Reserve Chairman Jerome Powell is likely to use his Friday morning speech in Jackson Hole, Wyo., to make a convincing case why the time for rate cuts has arrived. That case got a boost on Wednesday from new data showing much weaker job growth than officially reported by the Bureau of Labor Statistics. The S&P 500 edged higher after the BLS revisions.
BLS Revisions
BLS revisions showed 818,000 fewer jobs were added over the year through March than previously reported. That means employers added about 2.1 million workers, not 2.9 million.
Manufacturers added 115,000 fewer jobs, retailers 129,000 and the leisure and hospitality sector 150,000. The biggest downgrade came in professional and business services, where job growth was cut by 358,000.
Economists had flagged potential for a significant downgrade to previously reported data. That's because the Quarterly Census of Employment and Wages (QCEW) had pointed to slower-than-reported job growth through December. The QCEW covers more than 95% of U.S. jobs.
Goldman Sachs economists have noted that job gains by unauthorized immigrants, which have been strong lately, generally aren't reflected in the QCEW data. That could mean the reality check looks bigger than it is.
The monthly employment reports differ from the more comprehensive QCEW data. One reason is that the BLS has to guess the job loss from firms going out of business and job gains from newly created firms. Yet those estimates from firm births and deaths can be off the mark, especially when the economy is slowing or accelerating.
The revisions are still preliminary and won't be applied to official BLS data until early next year.
Powell At Jackson Hole Federal Reserve Symposium
Since January, Powell has said that the Fed is balancing the risk of easing too soon, which could lead inflation to stay stubbornly high, against the risk of moving too late. Moving late would open the door to unnecessary labor market weakness.
On Friday, Powell will likely say at his Jackson Hole speech that inflation has eased to the point where the risks are now tilted toward waiting too long. Although the soft July jobs report may have been weaker than it seemed due to the effects of Hurricane Beryl, hiring momentum has clearly slowed.
The latest Job Openings and Labor Turnover Survey showed that hiring slipped to 3.4% of total nonfarm employment in June. Outside of the pandemic-hit months of March and April 2020, that was the lowest since February 2014.
The unemployment rate, which unexpectedly rose to 4.3% from 4.1% in July, already exceeds the Fed's Q4 projection of 4%.
Economists say that the Fed will care more about current job growth than the softer revised data through March. However, the downward revisions suggest that Fed policy has been more restrictive than previously believed.
50-Basis-Point Fed Rate Cut?
As of Wednesday morning, markets are pricing in 100% odds of 75 basis points in rate cuts by the end of 2024. That equates to a quarter-point move at each of the year's three final meetings.
Markets see 70% odds of a full point in rate cuts, which indicates a strong chance of a half-point move at one of those meetings.
Those odds barely budged after the BLS revisions.
Yet the bar to a 50-basis-point move is high. It probably won't happen unless the recent brush with financial market instability returns or the signs of an economic slowdown become more pronounced. Here's a big reason why: BofA Global Research wrote this month that a 50-basis-point cut would likely spell the end of Fed balance-sheet shrinkage, also known as quantitative tightening or QT.
QT can continue if the Fed is just easing up on the restrictiveness of policy with quarter-point moves. Yet "the QT will likely stop" if the Fed has to resort to a bigger cut to stimulate the economy, the BofA team led by Mark Cabana wrote.
Otherwise, the Fed's balance sheet policy would be working at cross purposes from its interest-rate policy. Fed chair Powell said at his July 31 news conference that policymakers hadn't discussed the possibility of a forthcoming 50-basis-point move.
The Fed will release minutes from the July 30-31 policy meeting at 2 p.m. ET.
S&P 500
The S&P 500 rose 0.1% in early Wednesday stock market action ahead of the BLS job-growth revision. On Tuesday, the S&P 500 dipped 0.2%, pausing after rebounding 7.9% over the prior eight sessions.
That surge, the biggest over an eight-session stretch since March 2022, has lifted the S&P 500 to within 1.2% of its all-time closing high on July 16. The S&P 500 is up nearly 17.5% this year.
The slowing of the labor market has come even as asset prices have supported consumption. But the recent volatility has shown the Fed that the bull market also faces two-sided risk.
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