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

(Reuters) – The U.S. central bank decided to maintain its benchmark overnight interest rate in 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 reduction—whether 25 basis points or 50—will depend on economic data released in the interim.

Among the critical metrics the U.S. central bank is monitoring are:

INFLATION (PCE data scheduled for August 30; CPI data released August 14; CPI report set for September 11):

The personal consumption expenditures price index, which the Fed utilizes to gauge its 2% inflation goal, showed a slightly lower-than-anticipated annual increase of 2.5% in July, consistent with June’s results. The core index, which excludes food and energy, also came in slightly below expectations at 2.6%, unchanged from the previous month.

Fed officials are increasingly confident that inflation is returning to target sustainably, allowing a shift towards safeguarding the job market. The headline monthly rate was 0.2% in July, matching the core rate. Since April, when inflation softened following a spike early in the year, the unrounded headline rate has averaged 0.12%, and the core rate has averaged 0.17%, both effectively aligning with the Fed’s target on an annualized basis.

“With inflation on track to moderate back to the 2% target, the Fed is more free to focus on the health of the economy,” stated Michael Pearce, deputy chief U.S. economist at Oxford Economics.

EMPLOYMENT (Released August 2; next report due September 6):

In July, U.S. firms added a disappointing 114,000 jobs, with previous months’ data revised to show 29,000 fewer positions. This brought the three-month average payroll growth down to 170,000, below the typical levels seen before the COVID-19 pandemic.

The unemployment rate increased to 4.3%, raising concerns over a potential deterioration in the labor market and its implications for economic stability. The workforce expanded, but reports indicated that the slowdown is primarily due to reduced hiring rather than increased layoffs, with hiring dropping to a four-year low in June.

Average hourly wages rose by 3.6% year-over-year in July, compared to a 3.8% increase in June. The Fed views wage growth between 3.0% and 3.5% as consistent with achieving its 2% inflation target.

JOB OPENINGS (Released July 30; the next update will be available September 4):

The job market remains relatively strong, with job openings exceeding 8 million in June. The ratio of open jobs to unemployed persons decreased slightly to 1.2, maintaining a level similar to those seen in the years preceding the pandemic.

Powell has closely monitored the U.S. Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) for insights into labor market dynamics. The rapid increase in job openings during the pandemic—surpassing a 2-to-1 ratio of job openings per available worker—has since cooled considerably. Other metrics in the survey, like the quits rate, which has fallen to 2.1, have returned to pre-pandemic levels, indicating a potential balance between labor supply and demand. Although hiring has slowed, the layoff rate has remained stable, suggesting that employers are choosing to retain their workforce.