SoFi CEO enters prepaid forward contract on 1.5 million shares
President Trump has been incessantly pressuring Jerome Powell to cut rates ever since he took office. To wit, check out Trump’s latest post on Truth Social below. The Fed cut rates in late 2024 but stopped when Trump took office. Some claim the pause is political. Conversely, the Fed primarily supports its case with fears that tariffs could generate inflation. Given their grave error in stoking inflation in 2020 and 2021, they don’t want to make the same mistake again.
To better appreciate the situation, we compare the current environment to that when the Fed last cut rates in December 2024. We focus on the three goals as mandated to the Fed by Congress.
- Maximum employment: Based on 3-month averages, payroll growth is 35k today versus 209k last December. Personal income was growing at a 5.9% annual rate last December versus 2.7% now. JOLT’s job openings have slipped from 7,718 last December to 7,514.
- Stable prices: Last December, the 3-month CPI rate was 2.87% and trending higher. Today, the last 3-month average CPI rate is 1.70%. The latest annualized monthly reading is about 1.2% below last December’s rate. The Cleveland Fed 1-year expected inflation is slightly higher today at 2.80% versus 2.65% last December.
- Moderate long-term rates: Real rates (yields less inflation) have oscillated between 1.5% and 2.0% for the last few years. Before COVID, they were between 0% and 1%. Economic growth in the first half is averaging 1.25% compared to 2.60% in the second half of 2024.
Given that the labor market and economy are truly showing signs of weakening and tariffs are not overly impacting inflation, it seems Trump has a case. That said, it may be a few more months before the Fed appreciates how tariffs impact prices and the economy.
Labor Market Is Slowing Considerably
The BLS employment report was weaker than expected at +73k. However, more importantly, June’s data was revised sharply lower from 147k to 14k and May’s from 144k to 19k. Judging by the recent months, the pattern is clear: the U.S. labor market is slowing considerably, and there is enough data to conclude this isn’t a statistical or seasonal fluke. The graph below shows that with the revisions, the BLS has aligned with the ADP data, as we suspected would happen.
After the deluge of data last week, traders get a break. Most of the largest companies have reported earnings, except for Nvidia’s (NASDAQ:NVDA) earnings, which will not be reported until the end of the month. Economic data this week will be sparse. ISM services will headline the data. ISM Manufacturing last Friday slipped further into recessionary territory, as it has been for the better part of the previous three years. The good news is that ISM prices slipped as tariff-based inflation fears receded.
Most telling this week will be Fed speakers. We will get to hear their latest thoughts on the employment data and the growing odds of a rate cut in September.
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