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The push and pull of conflicting data sets and the crosscurrents of the Fed’s dual mission were on full display this week. And so was the specter of stagflation.
Producer prices surged in July, heating up far ahead of forecasts and offering an uncomfortable surprise of mounting pricing pressures on their way to consumers. At the same time, the number of Americans filing new applications for jobless benefits fell last week, signaling low layoffs.
But the reading also suggested people on the hunt for jobs are having a tough time. Firings aren’t ramping up, but neither are hirings — which the latest jobs report and its revisions made quite clear.
The data didn’t spark a second-guessing of a coming rate cut in September. But the market blinked. Odds of the Fed holding firm next month increased from 0% on Wednesday to 9% on Thursday after the releases, according to data from the CME Group. And the chances of a jumbo cut of 50 basis points in September have evaporated.
Things change fast, but the main takeaway hasn’t changed: Markets are still pricing in over a 90% chance the central bank will reduce rates when officials meet again.
But while those odds held fast, so has the conviction of market contrarians who predict the Fed won’t lower rates. Observers who haven’t bought into the inevitability of a September cut say that Thursday’s figures reinforced their position.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
“There is nothing in the latest week’s jobless claims data to alter the Federal Reserve’s view of the labor market or our call that the Fed will hold off on cutting rates until December,” said Nancy Vanden Houten, lead economist at Oxford Economics, in an email on Thursday.
The perplexing brew of economic commentary, data, and expectations will make Fed Chair Jerome Powell’s speech next week at the Jackson Hole Economic Symposium all the more relevant.
The stock market is at a record high on cut vibes, and “investors are hungry for additional validation,” as Clark Geranen, chief market strategist at CalBay Investments, put it in a note to clients on Thursday.
There’s a school of thought that the public cares more about inflation because it weakens all of us to some degree, whereas job losses can devastate a life or a household but are felt more narrowly by those unlucky enough to get axed by HR.
No doubt there are political and social dynamics that can make that theory more or less convincing. But Fed officials say they prioritize their dual mandates of stable prices and maximum employment using more dispassionate criteria: Which goal is more out of sync?
But therein lies stagflation’s biggest rub: It’s easy for policymakers to get it wrong when you have more than one way to stumble into error.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban.
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