Well, I gotta give Fed Chair Powell credit – he went big. Even though we discussed the lengths to which Powell went to prepare the market for a jumbo 50 bps cut – leaking the potential to Goldman Sachs, the Wall Street Journal and Bloomberg – it’s still a little bit of surprise…
After all, this is the man who was still calling inflation “transitory” when it blew past 5% in 2022. And his first move to stop inflation after it snowballed to 8% was to drop a tiny 0.25-point hike in its path, not even a speed bump…
So forgive me if I’m a little surprised Chair Powell made a bold move this time. Maybe old dogs can learn new tricks…
It is always stated that interest rates take a year to 18 months to really work their magic on the economy. It has been two and a half years since the Fed started hiking rates to combat inflation. And it’s only been in the last couple of months that inflation has fallen back into the range of the Fed’s 2% target…
Had Powell acted sooner, like in 2021 when inflation burst over the Fed’s 2% target, we wouldn’t be paying so much for eggs and used cars. But Powell’s denial allowed inflation to get firmly entrenched in the economy – and at a very high level too.
We may be seeing the same scenario happen with unemployment…
Unemployment Rising
We’ve looked at this chart before, but it still very relevant…
Unemployment has been rising basically all year. It didn’t start making headlines until it hit 4.3% in July. But the trajectory has been pretty obvious since April.
So Powell went big with a 50 bps rate cut today. That’s good. This exactly what he should’ve done if he wants to avoid repeating at least one of the mistakes he made with inflation. But he’s already given unemployment a big head start…
As part of his statement, Powell said: “We don’t think we are behind…We think this is timely but you can take this as a sign of our commitment not to get behind.”
During the Q&A session, Powell responded to one question by saying “I don’t see anything in the economy right now that suggests that the likelihood of a downturn is elevated.”
He must’ve missed the recent Challenger Job Cuts report. Every month, recruitment firm Challenger, Gray and Christmas puts out a report showing planned layoffs by corporations. The August report came out on September and showed a big spike to 75,891, nearly triple the number of planned layoffs from July.
That’s a big number. And while the Fed is playing it cool, saying that the time to cut rates is while the labor market is still strong, the fact that it went big with its first cut says something different. The Fed is definitely worried that unemployment is on the rise.
The market reacted in pretty predictable fashion to the Fed’s move. It spiked on the initial news of a 0.50% rate cut. And then it dropped into the close…
Could be nothing more than a knee-jerk reaction. Could also be that investors are worried that the Fed really is behind the curve on unemployment…
Just remember the lag time for interest rate moves: 12 to 18 months for changes in interest rates to work their way through the economy. The odds that the job market continues to weaken are still pretty high.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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