Earlier today, I heard a commentator on CNBC discuss today’s stock decline. He said something to the effect of, “It’s all about the Fed.” In fact, it’s rare that a day goes by that the Fed isn’t talked about that much. Yes, rising interest rates had an effect on falling stock prices, but these interest rate movements had nothing to do with the Fed.
No Fed meeting was held that day, and there were no important speeches. In fact, interest rates soared in response to the positive employment data. You can think of rates as being influenced by several factors. The Fisher effect and the income effect affect the equilibrium interest rate. Additionally, the Fed has some ability to move short-term interest rates above and below the equilibrium rate. Today’s jobs report likely led to a slight increase in expectations for nominal GDP growth (both higher inflation and higher real growth). That is the reason for the rise in interest rates. Interest rates had nothing to do with the Fed, at least in the way most people thought about Fed policy. . (Some might argue that this strong growth is partially a reflection of past Fed stimulus, but of course that’s not what the reporter meant.)
Some believe that interest rates have risen due to expectations of future Fed rate hikes. That’s putting the cart before the horse. Market interest rates rose on that day, raising expectations for the future federal funds rate. The Fed primarily follows the market.
Today’s employment statistics also included revisions to several previous reports. The peak unemployment rate for 2024 has been revised downward from 4.3% to 4.2%, making a “mini-recession” less likely. (I define a mini-recession as an increase in the unemployment rate of at least 1 percentage point.) The cyclical low in the unemployment rate was 3.4%, so I don’t think it would increase enough to qualify as a mini-recession. need to reach 4.4%. -recession. Last summer, when it was reported that the unemployment rate had reached 4.3%, I thought that outcome was very likely. Now I’m not so sure. At the same time, confidence that the Fed was controlling inflation became less and less certain. These two issues are related, as the Fed is trying to walk a fine line between having too little NGDP (risking recession) and too much NGDP (leading to high inflation).
In summary, the soft landing hypothesis is still quite plausible, but not certain. If inflation falls below 2.5% in 2025 and unemployment remains low, I would consider it a soft landing, meaning three years of very low unemployment and low inflation. This will be the first soft landing in U.S. history. A trade war would make achieving a soft landing even more difficult. As always, a 4% NGDP growth rate is likely to yield a positive outcome. My hunch is that it won’t fully land in 2025. Inflation will remain high due to high growth in NGDP. I hope I’m wrong.
