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

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

The extent of any potential reduction—either 25 or 50 basis points—will depend on economic data released before that meeting.

Key statistics the Fed is monitoring include:

Employment (Next Release: October 4):
In August, U.S. businesses added a disappointing 142,000 jobs, and revisions to previous months reduced the total by 86,000. This brings the three-month average payroll growth down to 116,000, a figure noticeably below pre-pandemic levels, indicating a slowdown in the economy. Meanwhile, the unemployment rate dipped slightly to 4.2%, easing some concerns about rapid deterioration in the labor market.

Average hourly wages rose by 3.8% compared to the previous year, surpassing the 3.6% annual growth recorded in July. This wage growth adds complexity to the Fed’s considerations, as officials remain intent on keeping inflation in check. The Fed generally regards wage growth between 3.0% and 3.5% as congruent with its 2% inflation target.

Following the jobs report, the market briefly increased expectations for a 50-basis-point cut in the upcoming Fed meeting, but these odds have since adjusted to approximately 35%.

Job Openings (Next Release: October 1):
In recent months, many Fed officials have shifted their focus from inflation concerns to the labor market, where signs of weakening have become evident. The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) revealed that job openings in July were at their lowest in over three years. The ratio of job vacancies to unemployed individuals fell to 1.1-to-1, below the average noted in the year prior to the pandemic.

Additionally, Fed officials may express concern regarding a rise in layoffs as evidenced by the JOLTS report, which indicated layoffs reached 1.76 million in July—the highest since March 2023.

Inflation (Pending CPI Release: September 11):
The personal consumption expenditures price index, which the Fed utilizes to meet its 2% inflation target, registered an annual increase of 2.5% in July, consistent with June’s figures. The core index, excluding food and energy costs, also came in lower than anticipated at 2.6%, showing no change from the previous month.

Fed officials’ confidence in inflation returning to target sustainably is reinforced by month-on-month rates. The headline monthly rate for July was 0.2%, matching the core rate. Since April, when inflation indicators started to cool after earlier increases, the average unrounded headline rate has hovered around 0.12%, with the core rate averaging 0.17%. These figures align with rates at or just below the Fed’s target.

In conclusion, the Fed is finding itself in a position to shift focus toward the health of the economy, with inflation showing signs of moderation towards the desired target.