Fed Chair Powell: ‘Strong’ Labor Market Tempers Rate-Cut Outlook; S&P 500 Waits On CPI

Federal Reserve Chairman Jerome Powell told the Senate banking panel on Tuesday morning that “labor market conditions have cooled, while remaining strong.” The S&P 500 remained slightly higher after release of Powell’s opening remarks, which were a bit of a negative surprise after Friday’s soft June jobs report.

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Despite Powell’s status-quo description of the labor market, the Fed is still expected to pivot to rate cuts at its Sept. 18 meeting. But Powell’s lack of immediate concern that the labor market is deviating from the Fed’s full-employment mandate may temper views about how much the Fed will cut this year. For now, lower inflation holds the key for Fed rate cuts, which raises the stakes for Thursday’s consumer price index report.

Fed Chair Powell

Powell’s testimony did note the rise in the unemployment rate, but only to “a low level of 4.1% in June.”

The jobless rate is at its highest level since late 2021 and even higher than the Fed’s 4% projection for the end of 2024. Unemployment is rising because the number of people entering or reentering the labor force has overtaken new job creation. Meanwhile, 12-month wage growth has fallen to 3.9%, the lowest since mid-2021.

Powell did note that “nominal wage growth has eased over the past year.”

Investors had reason to hope that Powell would downgrade his assessment after the June jobs report, which included big downward revisions to hiring gains in April and May. Over the past three months, net hiring by private firms has slowed to a monthly average of 146,666, the least since the pandemic shutdown.

Powell has said that unwarranted weakening of the labor market would create more urgency to lower the Fed’s key interest rate from restrictive levels. But his testimony before Congress makes clear that we’re not close to that point.

CPI Inflation

Powell’s testimony was pretty restrained about progress on inflation. Yet he offered this upbeat view at a European Central Bank forum last week: “We are getting back on a disinflationary path.”

The next big data point comes on Thursday at 8:30 a.m., with release of the June CPI. Economists expect a 0.1% overall CPI increase on the month, with a 0.2% rise in the core CPI, which strips out food and energy.

But it could go either way. Deutsche Bank expects a 0.25% rise in the core CPI as May’s decline in transportation services prices could lead to a rebound in June. However, Nomura predicts a tame 0.135% core CPI increase, thanks to lower prices for hotel and motel stays, as well as lower airfares.

Fed Rate-Cut Outlook

After Powell’s opening remarks, markets are pricing in 73% odds of a Fed rate cut at the Sept. 18 meeting, down slightly from 75% early Tuesday. Markets now see 72% odds of two quarter-point rate cuts before the end of 2024, essentially, down from 75%.

S&P 500

The S&P 500 rose 0.1% after Powell’s remarks in Tuesday morning stock market action. The 10-year Treasury yield climbed five basis points to 4.32%.

On Monday, the S&P 500 edged up 0.1%, extending its winning streak to five sessions and chalking up its 35th record high this year. The S&P 500 has climbed 17% in 2024.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

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