Implications of less restrictive monetary policy

Our August forecast update shows the economic expansion that has been in place since mid-2020 will continue. That said, the lackluster pace of hiring in July, combined with other labor market indicators continuing to weaken, implies weaker income growth which will eventually weigh on consumer spending.
In light of these adverse developments, we now look for the FOMC to cut rates by 50 bps at its meeting on September 18 with another 50 bps rate cut on November 7. We forecast the Committee will reduce its target range for the federal funds rate to 3.25%–3.50% by the middle of next year.
We have adjusted our consumer forecast and now look for real PCE to slow materially at the end of this year and start of next year before rebounding in the second half of next year amid less restrictive monetary policy.
Another area poised to eventually benefit from lower interest rates is housing, and we have taken up our residential forecast coinciding with recent declines in the mortgage rate and expectations for further rate softening next year.
We now look for the monthly pace of nonfarm payroll gains to average 116K over the next 12 months compared to 209K the past 12 months. The unemployment rate is likely to edge up to 4.5% in Q4, before less restrictive monetary policy and slower labor force growth helps turn the current upward trend around.
We have made no significant changes to our inflation outlook over the past month. The core PCE price index still looks set to increase 2.6% on a year-over-year basis in Q4-2024.

At the start of this year, a soft landing for the U.S. economy looked like a difficult task for the Federal Reserve to achieve. A Bloomberg survey of 45 economic shops at the start of the year put the odds of recession at 50%. The most recent version of the same survey put those odds at just 30% in July. Until very recently, financial markets appeared to have moved from “soft landing” to “no landing at all.” Then the July jobs report shook up the snow globe and reset expectations for the rest of the year and beyond. It is an unusual state of affairs for one report to meaningfully disrupt financial markets and reframe economic expectations. We explore what has changed, what hasn’t and what to watch at this pivotal point in monetary policy.

Long-simmering jobs market troubles finally boiled over

It is the normal state of things for financial markets to parse economic data for clues about everything from corporate profits to the health of the consumer, but 2024 has been characterized by a fascination with inflation data as though it were the only lens through which to view Fed policy. At the start of the year, with a tight labor market and inflation trending lower, financial market participants wagered steep rate cuts were in store by year-end (Figure 1). But those hopes were dashed by inflation data that came in too-hot-to-handle for the first several months of the year before giving way to a more orderly slowing in price growth recently. In the subsequent months, every piece of economic data was strip-mined for clues about inflation with little regard for data about other aspects of economic health. This preoccupation with the “low and stable prices” side of the Fed’s dual mandate felt reasonable, even safe, with the unemployment rate building on a record stretch of months below 4% as it was at the start of the year.

We have chronicled the deterioration in the labor market evident in indicators other than the monthly jobs report throughout the course of the year. But observations about fewer job openings, a lower quits rate and a shrinking share of consumers saying that jobs are plentiful tend to be discounted when the monthly jobs number keeps coming in above expectations. Suffice to say, in the wake of July’s disappointing jobs report and the seismic reaction from global financial markets, everyone is awake to the risk of a slowing U.S. jobs market and the “maximum employment” side of the Fed’s mandate is back in focus.

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For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. 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There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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