Two steps forward, one step back

The goal is clear, but the path is uneven. 

Not an ancient proverb, but certainly describes the journey the Federal Reserve is taking to achieve its dual goals of maximum employment and price stability. Data released last week perfectly sums that up. 

As the unemployment rate rose to 4.1% in June, concerns over the labor market began to increase. Somewhat arcane recession measures were trotted out to indicate that this level of labor weakening very nearly qualified the economy as being in recession. Fast-forward to weekly jobless claims, which fell by 17,000, to 222,000, continuing their historically low level. The labor market seems okay. What about inflation?

June consumer prices actually fell 0.1%, and inflation over the last year declined from 3.3% to 3.0%. Markets cheered that result and began assuming the news would give the Fed room to cut the federal funds rate, perhaps as soon as at the September 18 meeting. Other inflation measures, from the New York Fed and the University of Michigan consumer sentiment survey, also pointed to slowly falling inflation. But producer (wholesale) prices increased 0.2% in June and 2.6% over the last year, both above expectations. Two steps forward and one step back, but at least it’s progress.

Fed Chair Powell reiterated the Fed will continue its patient approach. The risks to achieving the employment and inflation goals are coming into better balance, but the Fed needs greater confidence the latter is moving sustainably toward 2%. The hope is that slow and steady wins this race.