Evelyn Reynolds

Markets are pricing in an aggressive path for interest rate cuts starting in September with a quarter percentage point reduction, which would be the first since the early days of the Covid crisis.
“The Fed needs to start that process back gradually to normal, which means gradually reducing interest rates,” said economist Claudia Sahm, known for devising a rule that uses unemployment as a yardstick for recessions.
DoubleLine CEO Jeffrey Gundlach also thinks the Fed is risking recession by holding a hard line on rates.

Federal Reserve Chairman Jerome Powell arrives to speak at a news conference following a Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Board Building on July 31, 2024 in Washington, DC. 
Andrew Harnik | Getty Images

If the Federal Reserve is starting to set the table for interest rate reductions, some parts of the market are getting impatient for dinner to be served.
“What is it they’re looking for?” Claudia Sahm, chief economist at New Century Advisors, said on CNBC just after the Fed concluded its meeting Wednesday. “The bar is getting set pretty high and that really doesn’t make a lot of sense. The Fed needs to start that process back gradually to normal, which means gradually reducing interest rates.”

Known for formulating the Sahm Rule that uses changes in the inflation rate to gauge when recessions occur, Sahm has been clamoring for the central bank to start easing monetary policy so it doesn’t drag the economy into recession. The rule states that when the three-month average of the unemployment rate is half a percentage point above its 12-month low, the economy is in recession.
The 4.1% jobless level is only a short distance from triggering the rule, and Sahm said the Fed’s insistence on holding short-term interest rates at their highest level in 23 years is endangering the economy.
“We don’t need a weak economy to get that last little bit out of inflation,” she said. “We do not have to be afraid of a good economy. If the inflation job is done, or we’re on that glide path, it’s OK, the Fed can start stepping aside.”
Asked about the Sahm Rule during his post-meeting news conference, Fed Chair Jerome Powell called it a “statistical regularity” that doesn’t necessarily hold true this time around as the jobs picture remains strong and the pace of wage gains decelerates.
“What it looks like is a normalizing labor market, job creation and a pretty decent level of wages going up at a strong level but coming down gradually,” he said. “If it turns out to … show something more than that, then we’re well-positioned to respond.”

Cautious approach

Markets, though, are pricing in an aggressive path for rate cuts starting in September with a quarter percentage point reduction, which would be the first since the early days of the Covid crisis.
After that, markets expect cuts in November and December, with an about 11% probability assigned to the equivalent of a full percentage point lopped off the fed funds rate by year end, according to the CME Group’s FedWatch gauge of 30-day fed funds futures contracts.
Instead of starting to take its foot off the brake, the Fed on Wednesday said it is keeping its overnight borrowing rate in a range between 5.25%-5.5%. The post-meeting statement did note progress made on inflation, but also reiterated that policymakers on the rate-setting Federal Open Market Committee need “greater confidence” that inflation is heading back to 2% before they will be ready to lower rates.
DoubleLine CEO Jeffrey Gundlach also thinks the Fed is risking recession by holding a hard line on rates.
“That’s exactly what I think because I’ve been at this game for over 40 years, and it seems to happen every single time,” Gundlach said, speaking to CNBC’s Scott Wapner on “Closing Bell.” “All the other underlying aspects of employment data are not improving. They’re deteriorating. And so once it starts to get to that upper level, where they have to start cutting rates, it is going to be more than they think.”
In fact, he thinks the Fed could end up slashing rates by 1.5 percentage points over the next year, a pace that’s more aggressive than the policymakers charted when they last updated the “dot plot” of individual projections.
Gundlach figures that the consumer price index will be below 3% soon, making real rates, or the difference with the fed funds rate, particularly high.
“If you have a positive real interest rate that’s even one and a half percent, that would suggest you have 150 basis points of room to cut rates without even thinking that you’re being excessive about it,” he said. “I think they should have cut today, quite frankly.”

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Private payrolls increased by just 122,000 in July, the slowest pace since January and below the upwardly revised 155,000 in June and the estimate for 150,000, ADP reported.
Wages for those who stayed in their jobs increased 4.8% from a year ago, the smallest increase since July 2021.

A “Now Hiring” sign is seen at a FedEx location on Broadway on June 07, 2024 in New York City. 
Michael M. Santiago | Getty Images

Private job growth slowed further in July while the pace of wage gains hit a three-year low, payrolls processing firm ADP reported Wednesday.
Companies added just 122,000 jobs on the month, the slowest pace since January and below the upwardly revised 155,000 in June. Economists surveyed by Dow Jones had been looking for a gain of 150,000.

ADP also reported that wages for those who stayed in their jobs increased 4.8% from a year ago, the smallest increase since July 2021 and down 0.1 percentage point from June.
“With wage growth abating, the labor market is playing along with the Federal Reserve’s effort to slow inflation,” said ADP chief economist Nela Richardson. “If inflation goes back up, it won’t be because of labor.”
Futures tied to major stock indexes added to gains following the report while Treasury yields fell.
There was more positive inflation news Wednesday, as the Labor Department’s Bureau of Labor Services reported that the employment cost index, an indicator Fed officials watch closely, increased just 0.9% in the second quarter, according to seasonally adjusted figures.
That was below the 1.2% acceleration in the first quarter and the Dow Jones estimate for a 1% increase.

Both reports could add to the likelihood that the Fed will signal a September rate cut when it concludes its two-day meeting later in the day.
Job growth was heavily concentrated in two sectors — trade, transportation and utilities, which added 61,000 workers, and construction, which contributed 39,000. Other sectors seeing gains included leisure and hospitality (24,000), education and health services (22,000) and other services (19,000).
Several sectors reported net losses on the month. They included professional and business services (-37,000), information (-18,000) and manufacturing (-4,000). Companies that employ fewer than 50 people also registered a loss, down 7,000 in June.
Geographically, the job gains were concentrated in the South, which saw a gain of 55,000, while the Midwest added just 17,000..
The ADP report comes two days before the Labor Department’s Bureau of Labor Services releases its nonfarm payrolls count, which, unlike the ADP tally, includes government jobs. The two reports can differ substantially, with ADP overshooting the BLS estimate of 136,000 for private payrolls in June.
Economists expect job growth of 185,000 in July, down from 206,000 in June, with the unemployment rate holding steady at 4.1%. More

Headline inflation in the euro zone unexpectedly rose to 2.6% in July, the European Union’s statistics agency said Wednesday.
Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, hit 2.9% in July, which was higher than expected.
The widely watched services inflation print came in at 4% for July, easing slightly from the 4.1% reading of June.

People shopping at the downtown market, Cour Lafayette, in Toulon, on July 27, 2024.
Magali Cohen / Hans Lucas | Afp | Getty Images

Headline inflation in the euro zone unexpectedly rose to 2.6% in July, the European Union’s statistics agency said Wednesday, even as price growth in the services sector eased slightly.
In June, inflation had come in at 2.5%, easing slightly from the 2.6% of May. Economists polled by Reuters had been expecting the headline figure for July to be unchanged from June’s reading at 2.5%.

Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, hit 2.9% in July, versus a Reuters estimate of 2.8%. The figure compared with a core print of 2.9% in June.
The widely watched services inflation print came in at 4% for July, down from the 4.1% of June.
Harmonized inflation inched higher in several key euro zone countries, including in leading economies Germany and France. In both countries, inflation had been at 2.5% in June and picked up to 2.6% in July.
The inflation rates come just a day after the release of the zone’s second quarter gross domestic product, which the European Union’s statistics office said grew 0.3% in the three months to the end of June.
This was above the 0.2% growth that economists polled by Reuters had expected, and came even as the euro zone’s largest economy Germany reported a 0.1% contraction.

Investors will now weigh how the fresh data will impact the European Central Bank’s trajectory for potential future interest rate cuts. The ECB held rates steady when it met earlier this month after reducing them in June. At the time, it left open the option for another cut in September.
The ECB Governing Council said it would continue to consider the dynamics and outlook of inflation, as well as the strength of monetary policy transmission in its decision-making. It stressed that was “not pre-committing to a particular rate path.”
Julien Lafargue, chief market strategist at Barclays Private Bank, on Wednesday said that the latest inflation figures are unlikely significantly impact the outlook for interest rates.
“While the hotter-than-expected headline inflation could be seen as a setback for the ECB, we don’t think it necessarily changes the narrative. Indeed, economic growth remains subdued — including the Q2 GDP print — which should help inflation remain on a downtrend,” he said.
The ECB could therefore still cut interest rates in September, Lafargue noted. More