The last FED meeting saw something that has not happened since 1993. The FED released their decision on interest rates and two voting members of the Federal Open Market Committee (FOMC) dissented from the vote to keep rates unchanged.
That’s a busy chart, but you can see in the circled part, the last time two governors dissented on a vote. Should we be concerned not about these dissents, but instead by how harmonious this important decision-making body has been over the many years seen here?
Why did they dissent? The concern at the FED is whether inflation is still a potential problem or not. We have been saying for some time that inflation is coming back to the arbitrary 2% level and that the labor market isn’t as strong as it appears in the headline number.
Here’s the latest jobs report with the revisions.
You can see in the dashed areas that many jobs have been revised downward over the last 6 months. The biggest revisions were last month when they revised down by 90%. That’s a big miss!
In fact, President Trump ended up firing the person in charge of those numbers. Fair or not? Not sure, but the data has been more unreliable the last couple years (see dashed above).
Finally, there have been many people that have “fallen” out of the labor force due to extended unemployment. That number has risen to roughly 25% (see the chart below).
If we adjust the unemployment numbers to reflect those that are no longer counted because they have dropped out of the labor force, the unemployment rate zooms significantly higher (over 5%). Not exactly the making of a highly inflationary economy.
Should the FED cut rates? In my opinion, they should have cut rates last month. Will they cut 50 basis points in September? We have five weeks of jobs numbers to come out before that, so it’s anybody's guess at this point. Right now, the markets are saying about an 86% chance of a 1/4 point cut in September.
We will see what the rest of the year holds for rate cuts, as well as longer-term interest rates. Will we see a mortgage rate with a five handle on it? That will likely revive the housing market, as there are still a lot of people on the sidelines waiting for houses to become more affordable. A lower interest rate would certainly help in that matter.
As always, please let us know if you have any questions about this or any other topic. We will be happy to have a conversation.