There is little doubt that the Fed has ample room to cut now given the past three months’ CPI data. But the recession narratives surrounding the US economy, and the risks to the labour market, have been overplayed. If the Fed had indeed erred, keeping policy overly tight in response to inaccurate payrolls data, it is not showing up in layoffs, the stock market (near all-time highs), or in credit spreads (which remain very tight).
This cycle is quite different to others in one important respect: it has not been credit-led. Households have continued to deleverage. Delinquency rates remain historically low, with mortgage arrears and commercial & industrial loan delinquencies barely rising. The 4-week moving average for unadjusted initial claims has once again fallen below 2023 levels.
Even before Jerome Powell’s dovish speech at Jackson Hole earlier today, markets were pricing in around 200 basis points of cuts over the next year. However, the US is not entering a recession. The Fed is signalling it is prepared to run this economy hot. Equities will benefit in the near term, as the S&P 500 pushes on to new highs. Long-dated Treasury yields will eventually begin to climb again, as the labour market tightens and growth firms.
