The Fed’s Dilemma: Rate Cuts, Tariffs, and Labor Market Trends

Jerome Powell isn't ruling out rate cuts, but says the Fed needs more time to assess the impact of Trump's new tariffs.

Recent inflation figures coming in cooler than expected, but Powell says the Fed is watching closely for signs of labor market weakness or surprise price spikes.

Some officials think that tariffs could justify a cut as early as this month, but others worry they could fuel inflation again.

Now investors are now betting on two rate cuts by year end and Joining me to weigh in on the latest US economic data is Jeffrey Roach, chief economist at LPL Financial.

Jeffrey, great to have you on the show.

Thank you so much for joining us ahead of the 4th of July holiday.

So we saw the June jobs report come in at 8:30 a.m. this morning and we are looking at US stock futures higher, but what do you make of the headline non-arm payrolls figure, especially on the heels of that weaker than expected ADP report yesterday?

I think given that this is a shorter trading week, I had a little bit of a scare yesterday from the ADP numbers suggesting that private payrolls were a lot smaller uh in the month of June.

Well, in contrast, as you mentioned, The official government statistics suggested otherwise that uh payrolls actually grew in June and that certainly added a little bit of comfort to the short week, uh, a little bit of, um, you know, a, a non-exciting report.

There, there weren't a lot.

A lot of important data that kind of came out of this.

One thing though that I think it's worth having our listeners think about is, you know, we saw the, the gains mostly in health related services, so hospitals, uh, healthcare related facilities, etc.

Outside of that, when you think about construction, manufacturing, retail trade, business services, not strong gains.

So perhaps that's showing a little bit of hesitation.

But it is, uh, the, the numbers are hovering around those longer term 12 month averages, that's certainly giving comfort for investors in the very near term.

Yeah, and another part of that jobs report we're paying attention to, of course, is the unemployment rate, which now stands at 4.1% for the latest month.

But overall, what's the real risk right now?

Is it rising prices, weakening labor market, or slowing growth in the US economy?

Well, we are starting to see a little bit of an uptick in what is termed long-term unemployed, so those that are unemployed for over 27 weeks.

And so I think that's really important metric to track.

I think that's somewhat of a leading indicator suggesting where the underlying pressures are.

Uh, so that's something to continue to watch.

We have seen a little bit of an uptick in the continued claims numbers you you gave those metrics earlier in your, uh, in your talk here, 1.9 million.

And that's suggesting that things are slowing, but the slowdown is fairly measured.

There's the soft landing narrative that we've talked about over the last year and a half.

Perhaps we're getting that.

One note of caution, of course, is we really have a number of major trading deals still yet to be determined.

That's a, that's certainly something to watch.

Yeah, and something that we're keeping our eyes on this morning is the nation's capital, so we'll be watching for that final House vote for Trump's mega bill.

So based on that, how might additional tax cuts and also higher deficits complicate the Fed's path forward when it comes to monetary policy, Jeffrey?

Well, there are some complicating factors right now for the Fed, but I think one key takeaway in the very near term again going back to what just happened, you know, just a few minutes ago with the June employment numbers, I think what this does, it allows the Fed to say at least in their July meeting, so they're meeting later this month, they can go ahead and keep that wait and see mode that they've had over the last little bit.

The labor market is holding steady enough.

To say let's keep those rates where they are and perhaps we can adjust and we have time to make adjustments later on in the year.

Remember, after the July meeting, they do have 3 additional meetings this year, so they do have plenty of time to adjust and recalibrate if necessary.

And finally, before I let you go for our audience who may be at the nation's airports and watching right now ahead of the holiday weekend, they might be concerned about the economy as we head into the second half of this year.

So with inflation still above target for the Fed end, uncertainty over trade tensions, how long will Main Street have to wait before seeing real relief in their bills?

And the big question also, what about their paychecks?

Well, that's right.

So the question on growth does go back to business demand and how interested businesses are to keep those payrolls growing, and if not growing, at least holding steady.

And keeping those wages growing at the right pace.

You know, so far this year, when you think about where we've been over the last several years, real disposable income growth has outpaced the growth of inflation for many households.

Now granted, we have two very, very different economies.

We have the haves and the have-nots.

That's a real struggle.

That's a real pressure point that policymakers need to think about.

But as long as the middle and upper income consumers Feel comfortable to keep spending because the labor market is holding steady.

I think that allows growth to continue, certainly not as strong as the rate of growth that we saw last year, but we'll see perhaps 2025 eke out a little bit of growth by the time we hit December of 2025.

OK, Jeffrey, well, we will have to leave it there, but thank you so much for joining us ahead of the holiday weekend and have a safe and happy Fourth of July.

Yeah, thank you.