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The Fed's Seesaw Dilemma

It’s a great day to be alive! JMo is gonna be paying for a nice Caribbean vacation next winter!

JMo Core PCE Wager Tracker
January      2.91%
February    2.81%
March          2.81%
April            2.75%

Average: 2.82% 

I’m not ahead by as much as I thought I would be (I would have guessed we’d be averaging 2.7% at this point), but I am feeling pretty good. JMo needs Core PCE to average 3.1% for the rest of the year to win.

Although it’s now June, keep in mind that Core PCE has a one month lag. On Friday, we got April’s data. Four months into the year, we’ve seen it continue to move lower, albeit slower than the second half of last year. At this pace, we’ll finish the year at 2.4%.

How quickly we’ve all forgotten that the Fed isn’t expecting inflation to reach 2% until 2026. And last week, the Cleveland Fed released research that suggested 2027.

As inflation comes down and unemployment goes up, the Fed’s monetary policy seesaw is moving into balance. Too much focus on inflation risks unemployment jumping.

I think the Fed is setting the stage to switch the focus from inflation to jobs. This will surprise you, but I don’t think the labor market is as strong as the headlines suggest.



This Week
  • 10T: 4.49%
    • German Bund: 2.58%·         
  • 2T: 4.95%·        
  • SOFR 5.31%·        
  • Term SOFR 5.33%·        
  • FOMC Meeting Minutes
    • Many concerns over stubborn inflation with various members mentioning they would tighten policy further if deemed appropriate·        
  • Fed Speeches
    • Bostic: “We’re not past the worry point in terms of inflation getting back to our target”
    • Waller: Needs “several more months” of good inflation data before backing rate cuts, but does not expect the FOMC to hike again


Core PCE 

Headline Core PCE came this close to being 2.7% instead of 2.8%. The official print was 2.75366%. A few tenths of a point less and the media would have been talking about a surprisingly cool inflation print. 

The monthly data came in at 0.2%. Last three month’s annualized is 3.2%. 

The Fed is likely still overreacting to the bs Q1 CPI numbers, which means they still want a few more months before a cut is on the table.  

The Fed’s last SEP suggested Core PCE would end the year at 2.6%. And that same SEP projected 3 cuts. What if we’re at 2.6% in June?  

They will have June’s data when they meet on July 31. The market has just a 12% chance of a cut in June, which I believe is too low.  

Friday’s job data will go a very long way in driving those odds. Consumer spending was a huge miss, which makes me wonder if the psychology around the labor market is starting to shift…


Jobs - Friday

Before we get the main event on Friday, Wednesday will bring my beloved JOLTS report. Last month showed a sharp decline in job listings, and that trend is likely to continue this month. The market will extrapolate that to Friday’s more important labor report, even though the correlation is weak at best.

Friday’s number will be a huge driver of rate cut expectations. Last month, we saw a 175k print – the weakest in 6 months. The market is going to take Friday’s number either as confirmation of a labor market slow down or that last month was a temporary detour.

I don’t care that much about Friday’s number (more so if it confirms my bias). I have lost faith in this report. Not only do we continually see last month’s report revised lower, but these darn birth/death adjustments are making up a huge portion of the “strong and resilient” job market.

Birth/deaths refer to businesses, not people, and the extrapolated job gains/losses from those businesses. A full 50% of last year’s job gains came from this estimate. With response rates down to 30% from 70%, why do we keep assuming these estimates are as accurate as they used to be?

Dr. Jeremy Horpedahl put together an interesting piece a month ago that suggested job gains are artificially inflated.

The BLS publishes the Quarterly Census of Employment and Wages (QCEW), which is as close to accurate job data as we can get (about 95% of job holders). Unfortunately, it has an enormous lag – more than a year. The last update was September 2023, which means we have to compare it to the September 2022 report. Comparing those two reports reveals a gain in jobs of 2.25mm, or an average of 187,500 per month. Still good, but not as crazy strong as the media headlines would suggest.

In fact, let’s compare the Establishment Survey (aka NFP), the Household Survey (aka UR), and the QWEC.


The most accurate measure of jobs, QWEC, suggests 73k few jobs gained per month than the headline report.

Even if Friday’s job report shows a gain of 200k+ and all the headlines scream about how surprisingly strong the labor market remains, I won’t be buying it.  

Dr. Horpedahl also points out how the BLS’s Business Employment Dynamics (BED) report is flashing warning signs about private sector hiring. Half of all jobs last year were healthcare/government, right? But the BED provides the ability to isolate private sector since it’s built off of the QWEC.

Even with the strong healthcare hiring, “The latest BED data do show a possibly worrying trend: the 3rd quarter of 2023 showed a net loss of 192,000 private-sector jobs. That’s the first loss since the height of the pandemic, and ignoring the first half of 2020, the only quarterly decline since 2017.”

I know I’m the only person on the planet that thinks a July cut is still on the table…but if the unemployment rate hits 4% on Friday, and if we’re willing to dig a little bit into the questionable job data, is it really that hard to imagine?

The Fed has an increasingly challenging game of seesaw. Inflation coming down, unemployment going up.

Said another way, the Fed may need to choose between inflation and jobs.

I think they will tolerate inflation taking longer to hit 2% if it means unemployment doesn’t go to 5%. They’ve already projected it will take until 2026, and now the Cleveland Fed is releasing research that says 2027. This isn’t a coincidence. They are setting the stage.

“We’re cutting to protect jobs even if that means it will take longer to get inflation to 2%.”

That sentiment does two things:

  1. Attempts to front run a lot of job losses
  2. Keeps inflation expectations anchored (it might take longer to get to 2%, but that doesn’t mean it’s going back up)

Powell has gone out of his way in the last three press conferences to address the potential for “unexpected weakness” in the labor market. This makes me optimistic he’s digging into the data.

But if the Fed’s focus remains on the bs NFP headlines report, the odds of waiting too long to cut go up dramatically.


The Week Ahead

I’ve got a trifecta laid on Friday’s report:

  • NFP 200k+
  • Unemployment 4%
  • Fed-speak overemphasizing the NFP