The Fed – Data Dependent?

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

If there’s one thing that I think of when I reflect on our industry, it is the plethora of data/information that is available to those of us in the investment community. As a result, I found it a bit surprising that following the most recent FOMC meeting the Fed pronounced their intentions to become more data-dependent! I would have expected that they were focused on the inputs all along.

I hesitate to add to your stockpile of inputs as you assess whether or not the US Federal Reserve will pause with their rate-raising campaign, further increase the Fed Funds Rate, or do what almost everyone is expecting or hoping for, which is to begin to ease once again. Obviously, inflation has fallen from the peak levels achieved last summer. Recent inflationary data is also supportive of a Fed pause, if not a pivot, but does history support this view.

I posted this info earlier this week on I shared that I had seen a very interesting chart that had been prepared by Goldman Sachs. As the graph below highlights, dating back to the mid-80s, there have been seven times when the Fed has paused raising rates in which the employment picture was considered “tight” (left side of the graph). In only ONE of those observations did the Fed cut rates within the next 6 months and there was also one time that they proceeded to raise rates again. Given the significant strength currently observed in our labor markets, it seems misguided to think that the Fed will pause and immediately begin to cut.

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Again, until we witness a meaningful change in our labor force, rates are not likely to move much or at all before year-end. It was reported just yesterday that the Unemployment Insurance Weekly Claims Report – Initial Claims had come in at 265K, which was up substantially from the previous week’s reading. Could this be the beginning of some weakness in the US Labor Force or is it the result of seasonal effects that might have skewed the data? Personally, I don’t see the unemployment rate spiking to a level that the Fed would see as confirming inflation tamed anytime soon. In fact, the Atlanta Fed’s GDPNow model is showing a 2.7% annualized GDP growth rate as of today for Q2’23. If that GDP # is anywhere close to accurate, that is much stronger growth than I think most in our industry are anticipating.

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