Fed cut is 'not emergency', but 'a pivot': Economist

Federal Reserve Chair Jerome Powell spoke at the Kansas City Fed's Jackson Hole Economic Policy Symposium, discussing the cooling trend in the labor market. He noted that while the unemployment rate has risen, it remains "low by historical standards," emphasizing that the cooling in the labor market is "unmistakable."

Dartmouth College Economics Professor & Former Federal Reserve Economist Andrew Levin joins Catalysts to provide his outlook on Powell's comments and the broader economic landscape.

Levin explains that there are two ways the labor market can cool: "lots of people losing their jobs" or many individuals joining the labor force. He notes that with inflation continuing to drive prices higher, it is leading to an influx of job seekers trying to "meet their expenses."

Regarding potential rate cuts, Levin states, "I would be extraordinarily surprised if the Fed cuts by 50 bps." While Powell indicated the Fed is now leaning towards an easing cycle and maintaining a strong labor market, Levin emphasizes that the Fed is not yet "in emergency mode," adding, "it's not emergency, it's a pivot."

Levin predicts a quarter-point basis cut at at least the next four Fed meetings.

Watch Federal Reserve Chair Jerome Powell's full speech here.

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

This post was written by Angel Smith

Video Transcript

Today, the labor market has cooled considerably from its formerly overheated state.

The unemployment rate began to rise over a year ago and is now at 4.3% still low by historical standards, but almost a full percentage point above its level.

In early 2023 the cooling in labor market conditions is unmistakable.

That was Federal Reserve Chair, Jay Powell moments ago speaking from Jackson Hole, talking about the cooling of the labor market for more on that labor market and his takeaways from Powell speech, we've got Andrew Levin.

He's Dartmouth College economics professor and former Federal Reserve Board, special adviser, Andrew.

It's great to speak with you.

I want to start right there on the labor market because it is the biggest risk to the FED moving forward here.

What do you think could happen to the path forward for the fed if we do get a surprise in the upcoming jobs?

Print on September 6?

Does that increase the likelihood of us getting a 50 basis point cut?

Come November?

I think, um, there are two ways the labor market can cool.

One of them is lots of people losing their jobs.

Um, and, you know, that's happened in the past, we see it in the new jobless claims numbers when that happens.

And that's driving, you know, those layoffs, drive up the unemployment rate.

That's not what we've been seeing for the past year.

Um, in fact, the, you know, yesterday's reports consistent, the, the, um, new jobless claims yesterday was around 230,000.

Um, that's about where it was a year ago.

Not too different than where it was in 2019 before the pandemic.

So, so the, there's, there's not massive layoffs happening.

So why is the unemployment rate going up?

How is the labor market cooling?

And the answer is a lot of people are, are, are, are, are joining the labor force and in particular, when you look at people 25 to 54 it's been amazing over the last few months that the number of people in that age group, the kind of core we call them prime age workers, um, joining the, the workforce looking for work.

Now, why is that happening?

Well, it's because people pocketbooks are tight.

Uh, prices have gone up a lot.

We just haven't caught up with those increases in prices.

And so families, um, need to have more hours of work in order to, to meet their expenses.

So the labor market is cooling, but it doesn't look anything like a recession.

Certainly not a standard recession.

So then Andrew, I guess my question is how do you see the Fed then factoring that into their future policy decisions just given the fact and pal talked about it ju just the supply dynamics and why it is so different than what we had seen in the past.

And then, then I guess to care to piggyback off of that.

What does this then do?

I, I guess your overall impression of the speech and the confidence that fed chair Jay Powell still seems to have that they are going to be able to pull off a soft landing.

Ok, great.

I think the first thing is I would be extraordinarily surprised if the Fed cuts rates by 50 basis points next month.

I just did not hear that at all in chair Powell's speech this morning.

Um There was the word he used was there's ample room for easing and that the Fed is strongly committed to supporting a strong labor market.

He didn't say that the economy is about to plummet into recession that, that they're not in emergency mode, which usually would be the case where they start making really forceful, large, extraordinary cuts, but it's not emergency.

It's a pivot.

Um And so I think what's probably coming is a quarter point cut at every meeting for the next four meetings in a row that would cut a percentage point and then they'll start to see um as they have in the past when they've done either.

Uh you know, a normalization cycle usually with raising rates up.

In this case, it's bringing them back down.

Um So it could end up being a, a full 2% point cuts.

That would be eight meetings in a row of a quarter point each and maybe a pause here or there.

Um So that means um eight meetings for now would be basically the middle of next year.

Uh The federal budget could be 2% points lower than it is.

Now if they continue to see inflation, um subsiding to the target and the employment rate is um close to where it is now, maybe more people join the workforce.

Um Maybe some of that le levels off.

Um The critical thing.

The reason why the Fed needs to ease rates is so that those people can find jobs.

We want a strong labor market, we want families to be able to meet their expenses.

Um That's part of the Fed's mandate along with price stability is to support full employment.

And so I think there's definitely ample room for them to support a strong labor market right now.