Where Does The BLS Jobs Report Leave The Fed's Rate Hikes?
Will Jay Powell Drive the Narrative Or Continue To Be Driven By It?
As one of my readers pointed out, calling “BS” on the July Employment Situation Report by the Bureau of Labor Statistics was a fairly easy call. The numbers are so contradictory and so incoherent as to make rational defense of them all but impossible.
However, there is one entity that is without a doubt not going to challenge the jobs numbers openly: The Federal Reserve.
Regardless of what the individual Federal Reserve Bank Presidents might think of the Employment Situation Report, regardless of what Fed Chairman Jay Powell might think, the Fed overall has little choice but to take government statistics at face value. From their perspective, the Employment Situation Report is the reality of employment in the United States.
How does the Federal Reserve respond to half a million jobs nominally being created in July, when its goal for the interest rate hikes is to cool down employment, as well as engineering a bit of demand destruction to bring down inflation? By its own metrics for success—lower employment and lower consumer prices—pursuing a tighter monetary policy through a succession of hikes in the Federal Funds Rate1 is so far not working: inflation rose again in June and may very well do so for July as well.
Does this compel the Fed to pursue even larger rate hikes? Will the Fed try to “jawbone” interest rates still higher between now and the September meeting of the Federal Open Market Committee—the rate-setting body within the Federal Reserve?
Wall Street Uncertain
Wall Street remains ever hopeful that the Fed will lose its collective nerve and back off any more interest rate hikes. Interest rates tend to push stock prices lower—Jay Powell’s last effort at raising interest rates in this country, right before the COVID pandemic, briefly triggered a bear market before he relented in 2019. Asset price inflation is the sort of inflation Wall Street dearly loves, and it flourishes when interest rates are low.
Consequently, the stock market indices had a mixed reaction to the BLS jobs report, with the Dow and the Russell 2000 Index slightly up on the day, while the S&P 500 and the Nasdaq finished the day in the red.
Despite the jump, the 10 Year Treasury remains stubbornly inverted against the 2 Year Treasury, with the inversion2 gap between their yields increasing on the day. Yields have been inverted across the entire lower end of the yield curve, and the jobs report did nothing to change that.
Wall Street’s immediate reaction to the jobs report has been to raise its expectation that come September the FOMC will issue another 75bps rate hike, rather than the 50bps hike that was projected as late as Thursday.
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