Explainer: Charting the Fed’s Economic Data Flow by Reuters

The U.S. central bank decided to maintain its benchmark overnight interest rate within the 5.25%-5.50% range at the end of its July 30-31 policy meeting. However, Federal Reserve Chair Jerome Powell has indicated that "the time has come for policy to adjust," suggesting that rate cuts could begin at the upcoming Sept. 17-18 meeting.

The potential magnitude of any rate reduction—whether it will be 25 basis points or 50—depends on economic data released before then.

Among the critical indicators being monitored by the central bank are:

Job Openings (Next release Oct. 1):
Recently, Fed officials have shifted their focus from inflation to the labor market, which has shown signs of weakening during the summer months. This change was reinforced by data indicating that job openings in July were the lowest in over three years, according to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS). The ratio of job vacancies to unemployed individuals fell to 1.1-to-1, dipping below the average recorded in the year preceding the pandemic.

Concerns may arise regarding an increase in layoffs. The rise in the unemployment rate had previously been attributed to a larger workforce, with job cuts remaining low until now. However, JOLTS data revealed that layoffs reached 1.76 million in July, marking the highest level since March 2023.

The likelihood of an initial 50-basis-point rate cut this month has increased significantly following this data.

Inflation (Upcoming CPI release Sept. 11):
The personal consumption expenditures (PCE) price index, which the Fed uses to gauge its 2% inflation target, reported a modest annual increase of 2.5% in July, consistent with June’s figure. The core index, excluding food and energy prices, was slightly lower than expected at 2.6%, unchanged from the previous month.

However, the month-on-month data from April onward supports the Fed’s increasing confidence that inflation is returning to its target sustainably, enabling a greater focus on job market stability. July’s headline monthly rate was 0.2%, identical to the core rate. Since April, the unrounded headline rate has averaged 0.12%, while the core rate has averaged 0.17%, both nearing the Fed’s target upon annualization.

Michael Pearce, deputy chief U.S. economist at Oxford Economics, commented that with inflation heading back to the 2% target, the Fed can focus more on the economy’s overall health.

Employment (Next release Sept. 6):
In July, U.S. companies added a disappointing 114,000 jobs, with revisions to the previous two months reducing the estimated job total by 29,000. This brought the three-month average payroll growth down to 170,000, a figure below the pre-pandemic norm.

Additionally, the unemployment rate climbed to 4.3%, raising concerns about a potential decline in the labor market and the economy’s vulnerability to recession.

Government data released in late July pointed to a deceleration in the labor market, primarily due to reduced hiring rather than increased layoffs, as new hires dropped to a four-year low in June. Meanwhile, average hourly wages rose by 3.6% compared to the previous year, down from a 3.8% increase in June. The Fed typically views wage growth in the range of 3.0%-3.5% as compatible with its 2% inflation objective.