A Fairly Quiet Day for Powell on the Hill; Jan JOLTS Show More of the Same
In today’s testimony in front of the House there was relatively little new news from Chair Powell.
That may have come as a bit of relief to markets, given Powell’s hawkish pushback at the January meeting, as rates barely moved in response to the testimony. Given looming NFP and CPI data, the March meeting being off the table, and the May + June meetings feeling forever away, the absence of response may not be too surprising.
Powell’s framing of cuts as a strong base case was in line with expectations, as was the stated view that the “policy rate is likely at its peak for this tightening cycle.” The default for the Fed seems to be a continued desire to make some cuts, reflecting their views on r* and the progress seen to date on inflation, but the data will tell them when and how many.
One exchange on the growth outlook stood out to me in particular for Powell’s relative optimism and the way it hinted at a much smaller downside growth tail necessitating less of a risk management concern there. Powell said that the base case is now “continued growth at a solid pace” and “there’s no reason to think that the us economy is in some kind of a short-term risk of falling into a recession.” I think this ‘solid’ range corresponds to roughly 1.2-2% GDP growth, comfortable, below trend to just a bit above. Overall, this suggests that we may see moderate revisions to the March SEP; 1.4->1.6 on 2024 GDP growth seems about right to me, perhaps the Fed is a bit more tentative in shifting its q4/q4 growth forecast this early in the year and we just get 1.5.
Powell also further reiterated that 2% PCE (implicitly on a 12m basis) isn’t the trigger for cuts. Rather the decision to start cutting will be driven by the FOMC gaining further confidence that they weren’t seeing an inaccurate signal from the good inflation readings in 2023H2. He said that the Fed need’s “just a bit more evidence so we can be confident”. Implicit in this is some m/m vol tolerance but also a bit of a concern that some of last year’s good data could be non-indicative of underlying inflation dynamics. Just like at the Jan meeting, the test is more about accumulating further good data points in an almost binary sense rather than continuing to being down 3-12m inflation rates; “we’d like to see more good relatively low inflation readings. We’re not looking for better inflation readings than we’ve had. We’re just looking for more of them.”
While lower inflation allows the Fed to become more symmetric in its relative weights on the two-sides of the mandate, “because the economy is so strong and the labor market is so strong, we think we can and should be careful as we approach” the decision to start cutting.
The rest of the testimony was the usual partisan wrangling and a series of notable exchanges on bank regulation, all of which suggested that the Basel endgame framework is under substantial pressure but I leave that to the banking analysts.
January JOLTS Data Keep the Story Largely the Same
This morning’s JOLTS release was overshadowed by Chair Powell’s appearance and saw no real departures in its general trends seen over the past few months.
Most notably, the layoffs rate continues to be at low levels never seen before covid hit. While recent headlines have grabbed attention for layoffs, the JOLTS data, WARN notices, Challenger data, and jobless claims all point to a continued very low layoff rate which seems below its cyclical peak (so far) in 2023H1.
The quits and gross hires rates continue show a bouncy payback period after the surge in job market churn which characterized the 2020-22 period. Both measures give some of the most negative readings on the labor market, but this is somewhat illusory in my view cumulative churn so overshot its usual pace during the pandemic era that workers and firms are now in re-equilibration period. This decline in churn, and openings, has made regaining employment for laid off workers somewhat more challenging.
Openings were essentially flat m/m. The formerly very in vogue total labor demand (employed workers + job openings) relative to labor supply measure has now ticked up the last couple of months. At a minimum, the Fed sees this as evidence that the labor market remains fairly tight if less tight than it once was.
Given my underlying view that the ISM and housing cycles have started to gradually bottom, the relative strength in both manufacturing and construction job openings since mid-2023 is notable. Perhaps unsurprisingly, retail trade continues to look like one of the weakest, or at least in need of further expansion, areas of the economy. Leisure and hospitality, which has been a consistent source of upside job gains since the mass layoffs during the pandemic lockdowns, has seen its openings rate decline and NFP growth slow notably. This is one of the areas of the labor market I’m watching most closely given the way demand there has supported the overall recovery even as other cyclical sectors, now seemingly starting to recover, were hit by the tightening cycle.
