The Fed stands firm, but a disappointing jobs report creates rate-cut pressure.
I bet most of you can relate to planning a road trip with your family and, when the day finally arrives, your kids pile into the car, body checking each other like NHL players as they fight over seats before briefly settling in. Then, 20 minutes into whatever five-hour ride you are taking, you hear THAT question emerge from the back: “Are we there yet?”
It felt like Federal Reserve Chair Jay Powell was in that driver’s seat this week, as reporters, market strategists, economists and even his own committee asked versions of “are we there yet?” on the topic of interest-rate cuts. Powell’s answer was, “No, we are not there yet,” much to the chagrin of many, most of all President Donald Trump.
Despite the president’s not-so-subtle urging, on Wednesday, the Fed opted to keep interest rates steady in a range of 4.25% to 4.50% for the fifth consecutive meeting. In its statement, the Fed updated its assessment of economic activity, downgrading the language describing growth from a “solid pace” to now noting that activity “moderated in the first half of the year.” The vote to keep rates steady this month was not unanimous; Governor Michelle Bowman and Governor Christopher Waller cast dissenting votes, as expected. This marks the first time that two governors have dissented since 1993. Governor Adriana Kugler, meanwhile, was absent from the July meeting.
Powell noted that inflation remains above the Fed’s 2% goal and has been affected by tariffs. Though he said a “good case” can be made that tariffs will have only a one-time effect on inflation, not a lasting one, he cautioned that “it’s still quite early days.”
“Higher tariffs have begun to show more clearly in the prices of some goods, but the overall effect remains to be seen,” Powell said in his press conference. Asked about the chance of a September rate cut, he replied that the Federal Open Market Committee (FOMC) doesn’t make such decisions in advance and that the Fed’s current stance, which he called “moderately restrictive,” guards against the risk of inflation. The danger, he said, is moving too quickly to lower rates and letting inflation reignite, but there’s also a danger of waiting too long and hurting the labor market. For now, he said, the labor market looks relatively balanced and the Fed’s current rates don’t appear to be holding back the economy.
Well, that was until this morning. U.S. July jobs growth of 73,000 missed expectations, and the government chopped 258,000 jobs from the prior two months’ reports, putting May jobs growth at just 19,000 and June at 14,000. That’s well below what’s needed to keep pace with population growth and suggests the economy might be slowing. It is also the most dramatic downward revision in five years. Unemployment rose to 4.2% from 4.1% in June. Health care jobs climbed, but no other major category changed much in a disappointing turn.
In addition to this employment shocker, Trump announced a deluge of tariffs this morning. The tariff rates varied, but one that stuck out is a 35% tariff on goods from Canada not protected by a previous trade agreement. That’s higher than the 15% tariffs for Japan and Europe, while Mexico received a 90-day extension. The tariffs don’t take effect until next Thursday, perhaps offering a last chance for some countries to reach agreements, while China has until August 12.
Major indexes sank and Treasury yields dove on this combination of news. Keep in mind, the markets may bounce back as investors begin to pin hopes that this “bad news” will force the Fed’s hand and cause a cut in interest rates fast. It would be hard for Powell to now argue we are not there yet.
Tech giants were busy reporting earnings this week, with overall very strong results, though investors seem to want nothing less than perfection. That perspective is not unreasonable, given how expensive some of these companies are. It is notable that 83% of companies reporting have beaten second-quarter earnings estimates and 67% are beating on revenue. S&P 500 companies are on pace for 8.5% year-over-year earnings growth, well above expectations for 5.8%. However, much of the strength comes directly from a small group of mega caps, masking overall tepid gains for many companies.
A word of caution as we enter the often-treacherous market months of August, September and October: It is important to remember how important long-term thinking is and how often short-term market movements can change dramatically in the matter of days and even weeks, if not months.
With the midpoint of earnings season near and many positive trade-related developments in the rearview mirror, there aren’t as many near-term catalysts to push stocks higher. This can lead to a profit-taking consolidation, when instead of buying the dips, investors sell the rips. Don’t be surprised if recent enthusiasm shifts, and don’t let that influence or shake your faith in your plan.
In the markets and investors’ favor, second-quarter GDP growth was 3.0% on an annualized basis, up from -0.5% in the first quarter. Earnings growth is still expected to be over 10% for the year. Diversification is working, as ownership in other markets has been effective and income remains healthy from cash and bonds.
Are we there yet for an interest rate cut? Yes, but it is not a panacea, and inflation is unlikely to go quietly into that good night. Let’s hope markets don’t rage against the shifting paradigm of global trade relationships but instead watch and wait for the evidence of its impacts and trust the calibration being made by management teams across the world to adapt to new circumstances. It has happened before, and as long-term investors we must trust it will happen again. We are working hard to select the companies and market segments where our faith in that transition is the strongest.
Safe travels as you hit the roads the rest of this summer, and as always, fasten your seatbelts!
Written by a human.