The Fed’s Dilemma: Inflation, Economic Growth, and Rate Cuts Explained

Today is Fed Day, a slew of economic data to digest ahead of this afternoon's presser with Fed chair Jay Powell.

Now, earlier today we got US economic data on GDP.

So without further ado, joining me is Jeffrey Roach, chief economist at LPL Financial.

So Jeffrey, thank you so much for joining me.

We saw that 2nd quarter read of GDP here in the US come in much better than expected, but there's a lot happening below the surface.

So tell us first and foremost how impacts from trade policy are showing up.

Yes, well, hi Remy.

Yes, you're exactly right.

So 8:30 this morning, uh, Eastern Time, got the latest read on the second quarter, but remember, for context, Q1 was negative, uh, GDP print, and that was really driven by businesses, uh, bringing forward and kind of uh preempting the tariff threats and importing a ton in the month of March.

So Q2 is a little bit of that reversal.

And so when you import less, you think about that's going to subtract less to the headline number.

Hence there's just a kind of a strange way of the GDP calculations.

So Q2 looked really strong, I think for our listeners here it's really important to remember that this is not necessarily a change in the underlying momentum.

It's really just a give and take and payback from Uh, the strong negatives when businesses imported so much in the first quarter.

Yeah, and Jeffrey, it's very interesting because Trump reacted to that GDP figure and he has been pressuring Powell, so we have to know that the Fed is designed to operate independently, setting rates without political pressure, whether we're talking about presidents as As far back as Reagan to Obama, even when they had pushed for cuts.

So given that inflation is still above target and the economy is growing, what is your take when it comes to the Fed?

And I know that you've said that the third time could possibly be a charm.

So can you explain this to us?

Yeah, that's right.

So you really don't want the Fed to cut rates when inflation is still above their 2% target.

Definitely you don't, you want, you don't want the Fed to cut aggressively.

Now here's where it gets a little bit nuanced.

I think the economy is poised for a slowdown the latter half of this year.

We can actually see it in the data even from this morning when you Look beyond just the net exports and inventories number when you look at real spending by the consumer on goods and services, you see the consumer spending numbers trending downward, suggesting that there is going to be a slowdown.

The latter half of this year, which actually does put the Fed in a good spot to cut rates a bit, not aggressively, but they can indeed cut from where they are now and still remain a little bit restrictive, given the fact that inflation is above the 2% target.

Report on Friday.

PCE tomorrow and at the beginning of last month, you said that the share of long-term unemployed is 4 points higher than before the pandemic, but we did get a slew of economic data out this week, including ADP and Joel.

So for the viewers out there, what's really happening with jobs in America?

Right, so as you accurately said, Remy, you're exactly right.

This week is just full of economic data.

We got a fair amount so far.

We still have a good bit of new information coming at us later today and this week.

So of course we had a Fed, we have a Fed press conference later, but we also do indeed get a non-farm payroll report for the month of July.

That's Friday morning.

And I think what's happening is you're seeing businesses a little bit reluctant to outright fire layoff announcements have been pretty hefty, but actual layoffs have not been as high as you would otherwise expect in a slowing.

Period.

I think businesses are saying, look, we've had years of struggling and finding qualified workers.

Remember back in 23 and 24, those years, businesses were saying one of the most important challenges that they were working through in in addition to some of the inflation pressures was just the challenge in finding qualified workers.

So I think what's going on is businesses are reluctant to fire, but also reluctant to hire.

So we're starting to see a continuation.

Of just a little bit slower payroll growth, uh, slowing down to perhaps around 110,000 on average monthly gains we actually could see a little bit softer than that.

Now, the nice thing is, if businesses are reluctant to outright fire, they want to keep their workers, they're just going to cut hours worked.

That's important to watch as we continue in the months ahead.

But that's giving us a little bit of stability.

Uh, for, for the investment.

So thank you so much for joining us today.