Ready, set, pause?
The July jobs numbers are a good sign for the Federal Reserve. More soft landing-esque economic data will allow the Fed to stop hiking rates. Investors like that. Solid earnings are helping too.
Jerome Powell and other Fed members should (mostly) be in a good mood today. The US economy added 187,000 jobs last month. That’s good but a slowdown from previous months…which should give the Fed ample reason to pause (and perhaps stop) its rate hiking campaign at the September meeting.
Sure, wage growth is still a little hot, coming in at 4.4% over the past 12 months. That might rekindle some inflation alarm bells. But for now, the market seems to think that the Fed will hold steady in September.
Fed funds futures on the CME are pricing in an 87% chance of no rate change at that meeting, up from 80% odds a week ago and a probability of just under 70% a month ago. Investors widely expect no rate change in November as well and are even starting to price in a small chance of a rate cut in December.
A so-called soft landing for the economy has often been elusive in the past. But this time might actually be different. If the Fed is really done raising rates, they may be stopping at just the right time. The stock market continues to sizzle thanks to expectations of steady economic growth. The job market is still in very good shape, even if the pace of hiring is slowing. And corporate earnings continue to impress. Just look at the results from Amazon, Starbucks and CVS this week.
Of course, it still remains to be seen whether or not the labor market can remain this robust for much longer. Investors should hope that it cools a bit. Because if wage growth remains stubbornly high, the Fed may turn a soft landing scenario into a recession by hiking rates more than investors are currently expecting. There are many economic and market wild cards out there. Hopefully the Fed knows what to do with the hand it’s holding.