Could a soft labor market lead to Fed rate cuts?

The Federal Reserve has consistently reiterated its stance that it needs to see substantial improvement in inflation before considering rate cuts. However, Macro Institute Chief Investment Strategist Brian Nick joins Market Domination to discuss why he believes the Fed could be compelled to cut rates due to a weakening labor market.

Nick acknowledges that "it's too soon" to determine whether the markets will experience a soft landing scenario or potentially face "something worse." However, he points out the reality that interest rates remain at elevated levels, banks are tightening their lending standards, and consumer delinquency is up. Coupled with a weak labor market, these are signs that point toward "a weaker consumer," Nick says.

Nick predicts that a rate cut could materialize near the end of July, stating his expectation that the unemployment rate "will move up uncomfortably high for the Fed," forcing them to act by cutting rates.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

Higher and wage growth slowed more than economists were expecting.Our next guest thinks the Fed may end up cutting rates, not because of inflation but because of a weakening of labour market for more we're bringing in now.Brian Nick, chief investment strategist at the Macro Institute.Brian, it's good to see you.You too.Thanks for having me.So maybe just to start, Brian, you know, you look around right now, these markets and, you know, decent economy, decent earnings.It sounds like, you know, Jay Powell basically just took, uh, at least a a hike off the table.It sounds pretty constructive, doesn't it?The question is, are we Are we sort of decelerating toward that soft landing or are we going to pass through the soft landing onto our way to something worse?And I think it's too soon for us to say for sure what's going to happen.Interest rates are still very high.We're still seeing that bite a lot.The sluice survey just came out, showing that more banks were continuing to tight lending standards a little bit surprised that we didn't see a continued tick down in the number of banks that are reporting, uh, tightening lending standards for businesses.Uh, for consumers, more consumers feel distress.There's more delinquencies happening.We'll get an update on that report from the Fed next week.That tends to be a time where you mentioned consumer discretionary under performing.It tends to be a moment where consumer discretionary tends to underperform as we start to see cracks in the labour market.Some cracks in the housing market potentially and that both leading sort of downstream towards a weaker consumer.So that's our concern as we move forward into the second half of the year.You know, we've been talking for so long about landings, Um, refresh our like, refresh our definitions.What is a hard landing?What is a soft landing?Because And I don't think the definitions are sort of hard and fast.So I guess, in your view, what would constitute a soft versus a hard landing versus a no landing or whatever else we're calling it?A hard landing for us would just mean we end this in a recession.Um, whether the Fed cuts rates in June, July or doesn't go until November December if we end up in a recession that's a hard landing means we're gonna get probably another percent to a 2% increase in the unemployment rate.That would be sort of your classic definition soft landing again, a little bit of a slippery definition.But I would say if you're looking at the potential for the Fed to start cutting interest rates without a material increase in the unemployment rate, the only time we've really seen that is in 1994 1995.So it's been a while.Most investors have not seen one in their sort of investing lifetime at this point.So, uh, it's been elusive, and one of the reasons is because interest rates tend to have this long and not so variable effect on the economy.So the the tightening of the Fed was doing two years ago is still with us today, and the tightening the Fed continues to do over the summer of 22 until last year is still coming online.And there just this this morning, I think President Barkin, uh from the Fed said he still thinks that we are yet to see the full impact of higher rates on the economy.Are you are you still, Brian, though, are you?Is your house view still you counting on cuts this year?We are because we think that the unemployment rate is gonna move up uncomfortably high.For when would you are you?September December?When do you think you'd see the first cut?So if you look at some of the leading indicators for unemployment, NFIB surveys things that tell us that the probably the unemployment picture is gonna start to get worse in July, August, September.So if the Fed doesn't cut in late July, which is that that that last meeting of the summer you'd be looking into September?But I think by that time we could be seeing not only fed cutting rates, but also cutting rates potentially by more than 25 basis points at a time.If they're if they're cutting because of the unemployment situation getting worse, not just because they are satisfied with inflation.What's uncomfortably high?Their forecast for the end of the year is 4%.We're at 3.9 right now, so it doesn't have to go much higher in so in their view, uncomfortably high.Even if it's not much worse, he said he would tolerate a few 10th higher than it was 3.8 when he did his press conference.I'm thinking, by the time we get to four and a quarter, certainly anything approaching 4.5, the Fed is gonna be in sort of five alarm fire mode.