Fed Might Focus on Weakening Labor Market Rather Than Inflation as It Mulls Rate Cuts: Economists

Markets,
including
crypto,
briefly
rose
after
Thursday’s
Consumer
Price
Index
(CPI)
report
which
showed
that
prices
cooled
more
than
expected
in
June,
spurring
hope
among
traders
that
the
Federal
Reserve
could
indeed
cut
interest
rates
this
year.

Even
though
Friday’s
less-closely
watched
Producer
Price
Index
(PPI)
data
came
in
hotter
than
expected,
traders
remained
confident
that
the
central
bank
will
cut
rates
in
September.
Odds
for
that
are
currently
just
under
95%,
according
to

CME’s
Fed
Watch
tool.

The
Fed
has
a
dual
mandate
–
to
keep
prices
stable
while
also
promoting
maximum
employment.
A
weakening
labor
market
might
thus
force
the
Fed
to
begin
easing
monetary
policy
well
before
inflation
returns
to
its
2%
target
(June’s
CPI
data
showed
inflation
rising
at
a
3%
year-over-year
pace).

The
U.S.
unemployment
rate
has
increased
for
three
consecutive
months
to
4.1%
in
June
from
3.8%
in
March.

“I
do
believe
the
labor
market
is
going
to
be
the
bigger
risk
to
the
economy
going
forward,”
said
John
Leer,
head
of
economic
intelligence
at
Morning
Consult.
“While
it
shows
signs
of
cooling,
it
remains
very
strong
by
historical
standards,”
he
added.
“It
would
be
a
historical
anomaly
if
the
Fed
manages
to
successfully
engineer
a
soft
landing,
i.e.,
tame
inflation
without
triggering
a
recession.”

Fed
Chair
Jerome
Powell
acknowledged
the
slowdown
in
the
labor
market
at
an
appearance
on
Capitol
Hill
earlier
this
week,
saying
that
it
is
no
longer
“a
source
of
broad
inflationary
pressures
for
the
economy.”

“The
Fed
will
be
worried
that
the
negative
trend
may
be
a
turning
point
for
additional
weakness
in
the
labor
market
down
the
road,”
said
Olu
Sonola,
Fitch
Ratings’
head
of
U.S.
economic
research.
“Chair
Powell
did
signal
earlier
this
week
that
the
balance
of
risk
between
the
unemployment
rate
and
inflation
is
now
two-sided
and
the
labor
market
is
now
back
in
balance.
This
gives
them
an
incentive
to
start
cutting
rates
sooner
than
later,
now
that
inflation
seems
to
be
back
on
that
path
down
to
2%.”

Even
if
the
Fed
starts
to
cut
rates,
this

might
not
be
as
bullish
of
a
signal
as
some
traders
think,
10x
Research’s
Markus
Thielen
said,
given
that
investors
in
a
weakening
economy
might
choose
to
pull
money
out
of
risk
assets
–
crypto
included
–
in
order
to
allocate
it
to
safer
investments.