Near-term labor market developments will be pivotal in determining the pace at which the Fed front-loads rate cuts.
- Economic activity: Comprehensive revisions have altered the quarterly path of GDP growth but don’t materially change a story of impressively robust growth amidst elevated real rates. Fiscal policy remains a wild card heading towards the presidential election on November 5 - whilst fiscal deficits seem likely to remain unsustainably large, they’re unlikely to increase at a sufficiently fast pace to continue acting as a tailwind to growth.
- Inflation: Core PCE inflation has on average been tracking below target for four months now and with the previously touted core non-housing services category only a touch firmer. This has opened the door for the Fed to front-load rates should labor conditions require, although core PCE inflation still running at 2.7% Y/Y warrants some caution over the magnitude of rate cuts in the near-term.
- Labor Market: Particularly strong supply side expansion has been a major driver of stronger than expected growth more broadly and the labor market is no exception, currently acting a barometer for broader economic health. The unemployment rising to 4.2% through the summer, triggering the Sahm Rule, has sparked the Fed to start its easing cycle with a 50bp cut to try and prevent a faster deterioration. Some forward indicators point to further increases.
- Outlook: Forecasts for near-term U.S. economic activity improved during the last three months, driven by domestic consumption and exports. That was at the expense of estimates of later periods, however.
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