Fed Chairman Powell finally admitted the U.S. economy has made a soft landing at this year’s Jackson Hole Federal Reserve Conference. “The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic,” he said in his speech.
It’s a very soft landing. The unemployment rate dropped back to 4.2 percent from 4.3 percent in July and just 142,000 nonfarm payroll jobs were created in August U.S. job gains in July were also lowered to 89,000 from 114,000, and in June revised down to 118,000 from 179,000.
The Fed is now playing catchup in the opposite direction. They waited too long to begin to restrict credit when the inflation rate first shot up in 2020 and perhaps waited too long to cut interest rates, since the downward momentum of lower job creation has begun.
This doesn’t mean a looming recession, however. It’s possible that third quarter economic growth will remain positive. Most estimates for Q3 growth are in the 2 percent range, down from the 3 percent Q2 GDP growth rate.
The Atlanta Fed estimate of Q3 growth said, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 2.1 percent on September 4, up from 2.0 percent on September 3,” because consumer spending has slowed but there was an increase in domestic investment.
The New York Fed’s ‘Nowcast’ growth estimate for Q3 is 2.6%.
The Fed’s tools to ‘brake’ inflation have always been crude since they must look in the rearview mirror for data to buttress their policies. They must convince the financial markets as well as the public that their moves are credible with data that measures past months to spot trends—mainly consumer spending and employment.
Better news is that the so-called yield curve (the relation of 2-year bond yields to 10-year bond yields) is no longer inverted. The 2-year bond yield has plunged to 3.67% and 10-year bond yield is 3.87% at this writing.
It has been a credible recession indicator when yields are inverted because banks can’t lend at a lower rate than their cost of money.
The yield curve is steepening again, in other words, because conditions are looking better for investors so that long-term yields are higher than short-term bond yields, which is where they should be in more normal times.
Consumers must now adjust as well—and save a bit more for any future uncertainties. But they are still solvent and fully employed. And the fact that the Fed is now poised to loosen the credit tourniquet that has stifled growth in many sectors (such as housing and manufacturing) should mean several years of rising prosperity for most Americans.
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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