By: Aaron Wall, CFA
Partner, Portfolio Manager
This morning, the Bureau of Labor Statistics released its July jobs report. In July, the unemployment rate increased to 4.2%, in line with the market's expectations. The report missed the forecast of 104,000 jobs added, with the actual number coming in at 74,000. The major takeaway from this report had to do with revisions. The May report figure was revised down by 125,000 jobs, while June was revised down by 133,000 jobs.
Earlier this week, the Fed held its July meeting and voted to keep interest rates unchanged. This was widely anticipated by the market and came as little surprise, although how the FOMC arrived at the decision drew attention.
No Cut, Two Dissents
For the first time since 1993, two members of the committee dissented to the decision, instead favoring a 0.25% interest rate cut. After the previous Fed meeting and prior to dissenting, Christopher Waller and Michelle Bowman were in the media saying they were becoming more open to cutting interest rates. In a speech two weeks ago, Waller said:“… a host of data argues that monetary policy should be close to neutral, not restrictive. Real gross domestic product (GDP) growth was likely around 1 percent in the first half of this year and is expected to remain soft for the rest of 2025, much lower than the median of FOMC participants' estimates of longer-run GDP growth.
“Meanwhile, the unemployment rate is 4.1 percent, near the Committee's longer-run estimate, and headline inflation is close to our target at just slightly above 2 percent if we put aside tariff effects that I believe will be temporary. Taken together, the data imply the policy rate should be around neutral.”
Waller’s view, implying that the balance of risk has shifted so that inflation no longer needs to be the sole focus of monetary policy, is not out of consensus when reviewing the economic data. However, it is important to factor the volatile policy environment into any analysis related to monetary policy. The impact of tariffs, as we’ve long stated, will take time to appear in the hard economic data.
The Fed remains in a difficult position. It does appear that the committee is becoming more comfortable with the idea that the impact of tariffs may be transitory. (Although it would never use that word again!)
As Chair Powell stated in his press conference, the Fed’s goal with future rate cuts is to be “efficient.” Quickly cutting rates just to raise them again to combat unforeseen inflation would be inefficient, he elaborated.
The quiet meeting this week should set up a more dramatic meeting in September. The market is widely viewing this meeting as “live,” meaning there is a chance that the Fed resumes cutting. As of Thursday, the fed fund futures market was forecasting a 39.2% chance of a cut in September. After the jobs report published Friday morning, this measure jumped to 79.3%.
