Explained – Mapping the Fed’s Economic Data Stream By Reuters

(Reuters) – The U.S. central bank kept its key short-term investment rate steady at 5.25%-5.50% at the end of its July 30-31 policy meeting, but Federal Reserve Chairman Jerome Powell has since said “the time has come to adjust policy.” He indicated that rate cuts are likely to begin at the Sept. 17-18 meeting.

How big the reduction will be – 25 or 50 basis points – will depend on the data available until then.

Some key statistics that the US central bank pays attention to:

EMPLOYMENT (released September 6; next release October 4):

U.S. companies added a weaker-than-expected 142,000 jobs in August, and revisions to the previous two months shaved 86,000 positions off the previous estimate. That pushed the three-month average total payroll growth down to 116,000, well below the level typical before the COVID-19 pandemic, providing further evidence that the economy is slowing.

However, the unemployment rate fell slightly to 4.2%, which could ease fears that the labor market is deteriorating rapidly or that the economy is on the brink of a recession.

Average hourly earnings also rose 3.8% in August from a year ago, compared with an annual increase of 3.6% in July, which could cause a ripple in the Fed’s deliberations later this month as officials remain keen to ensure inflation is fully under control. The U.S. central bank generally views wage growth in the 3.0%-3.5% range as consistent with its 2% inflation target.

Immediately after the jobs report, traders briefly raised their bets on a 50 basis point rate cut at the Fed’s next meeting to roughly even odds. The odds of such a move were recently about 35%.

VACANCIES (published on September 4; next publication on October 1):

Most Fed officials have shifted their focus in recent months from inflation to the labor market, which began to show clear signs of weakening this summer.

That shift in focus was further validated by data showing that the number of job openings in July was the lowest in more than three years, according to the U.S. Department of Labor’s Job Openings and Labor Turnover Survey (JOLTS). Additionally, the ratio of job openings to unemployed people fell to 1.1-to-1 and is now lower than the average in the 12 months prior to the COVID-19 pandemic.

Fed officials may also be raising concerns about the increase in layoffs reflected in the report. The recent rise in the unemployment rate has largely been seen as a result of an increase in the size of the labor force, with outright layoffs remaining low thus far. The JOLTS data showed that layoffs totaled 1.76 million in July, the highest number since March 2023.

INFLATION (PCE published on August 30; CPI published on August 14; CPI published on September 11):

The personal consumption expenditures price index, which the Fed uses to set its 2% inflation target, was slightly softer than forecast in July, rising 2.5% annually, unchanged from June. The core index excluding food and energy costs was also slightly weaker than forecast, at 2.6%, also unchanged from the previous month.

But it is the month-on-month rates from April onward that are convincing Fed officials that inflation is returning to target on a sustained basis, allowing them to focus on protecting the labor market.

The monthly prime rate in July was 0.2%, as was the core rate. Since April, when readings softened after a rise in the first quarter of the year, the unrounded prime rate has averaged 0.12% and the core rate has averaged 0.17%, both of which effectively annualize to rates at or slightly below the Fed’s target.

“With inflation now on track to return to its 2% target, the Fed can focus more on the health of the economy,” Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in a note.