The Fed's job doesn't get any easier
Weekly Bond Commentary
Although the Federal Reserve lowered the federal funds rate by 0.25% at its September 17 meeting, Chair Powell rejected the notion that policy is following a pre-set path. Rather, he said policymakers will respond to whichever dual mandate priority gets more out of balance. At this point, they are worrying more about the labor market but have not taken their eyes off inflation.
Last week saw more evidence of stubborn inflation. The Fed’s preferred measure, the Personal Consumption Expenditures Index, showed that annualized inflation ticked higher in August, from 2.6% to 2.7%, while the underlying, “core," measure remained at 2.9%. Both remain above the central bank’s 2% target. Prices of goods were soft, while services prices were elevated. Particularly troublingly, goods prices are likely to accelerate in coming months as companies pass tariff costs to consumers, who registered concern in the latest University of Michigan sentiment survey. Nearly half of respondents said increasing prices are eroding their personal finances — the highest amount in a year.
Many surveyed also worry about the weakening labor market. But weekly jobless claims fell back to 218,000. All eyes are now focused on the September employment report, which is expected to recover from August’s anemic 22,000 jobs increase, even as the unemployment rate should hold steady at 4.3%.
Personal income and spending increased in August, even as measures of manufacturing and services activity in the broader economy eased lower, though remaining in expansionary territory.