This morning, I listened to a CNBC commentator discussing today’s stock decline. He said something to the effect of, “It’s all about the Fed.” In fact, there’s rarely a day when I’m not that interested in the Fed. Yes, higher interest rates have contributed to the decline in stock prices, but these interest rate movements have nothing to do with the Fed.
There was no Fed meeting today and no major speeches. Instead, rates surged after the strong jobs report. You can think about the ratio being influenced by several factors. The Fisher effect and the income effect affect the equilibrium interest rate. Additionally, the Federal Reserve has the ability to move short-term interest rates above or below the equilibrium rate. Today’s employment report probably pushed the expected growth rate in nominal GDP slightly higher (both higher inflation and higher real growth). This is why interest rates have risen. It has nothing to do with the Fed, at least not in the way most people think about Fed policy. . (It could be argued that the strong growth partly reflected previous Fed stimulus, but of course that’s not what the reporter meant.)
Some people say interest rates have risen in anticipation of future interest rate hikes from the Federal Reserve. That’s putting the cart before the horse. Because market interest rates have risen today, expectations about future federal funds rates have also risen. The Fed primarily follows the markets.
Today’s Jobs report also revises several previous reports. The highest unemployment rate in 2024 was lowered from 4.3% to 4.2%, reducing the possibility of a ‘mini-recession’. (I define a mini-recession as an increase in the unemployment rate of at least 1 percentage point.) The low point of the recession was 3.4%, so it would have to reach 4.4% for it to rise enough to be considered a mini-recession. -recession. When it was reported last summer that the unemployment rate had reached 4.3%, I thought that the likelihood of such an outcome was very high. Now I am much less sure. At the same time, I am becoming less and less confident that the Fed has inflation under control. These two issues are related as the Fed struggles to walk a fine line between too little NGDP (which risks a recession) and too much NGDP (which leads to high inflation).
In summary, the soft landing hypothesis is still quite plausible, but not certain. If inflation falls below 2.5% in 2025 and unemployment remains low, I would consider this a soft landing – three years of very low unemployment and low inflation. This will be the first soft landing in U.S. history. A trade war will make a soft landing more difficult. As always, a 4% NGDP growth rate is more likely to produce good results. My hunch is that in 2025 we won’t be landing at all. High NGDP growth will continue to push inflation higher. I hope I’m wrong.
