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To judge by today's reaction to the news, the bond market thinks that today's upside jobs surprise increases the chances of a Fed rate hike at the next FOMC meeting (September 16) from 50% to 60%. I disagree. If anything, I would argue that jobs growth remains so weak that a rate hike might pose a threat to the economy. Recall that two years ago the Fed began a series of six rate cuts which ended last December. That was likely the catalyst that arrested the decline in jobs growth which began in early 2022. Also recall that there is a "long and variable lag" between monetary policy changes and their impact on the economy.
Nevertheless, jobs growth these days pales in importance compared to the rate of inflation. Expectations for next Friday's CPI report call for little or no change from last month's 3.4% y/y for total, and 2.4% for core—both currently running at only slightly more than Warsh's target. Meanwhile, the housing market continues to suffer from very slow sales growth, weak residential construction, elevated mortgage rates, and flat to falling home prices. These latter factors are likely to act as a continued headwind to the government's CPI calculation, as they have been doing for the past several years.
It's a good thing that Fed Chair Kevin Warsh is hyper-focused on reigning in inflation, but I don't think he will interpret these developments as a reason to raise rates any time soon.
Chart #1
Chart #1 compares the level of private and public sector jobs. Of note, private sector jobs growth has been tepid in recent years, while public sector jobs—particularly at the federal level—have suffered a significant decline, thanks to Trump’s efforts to trim the federal workforce, which has shrunk by almost 2.7 million on his watch and hasn't been this small since 1966!
Chart #2
Chart #2 compares the growth rate of private sector jobs, measured on a 6-month annualized and a year over year basis. (Doing this is essential to filter out the notorious “noise” in the monthly data.) It is becoming clear that the economy's vitality reached a low ebb in late 2025 and has since begun to recover.
16 comments:
Scott-
What do you think about the "Less forward guidance" statements from Warsh? Why the change?
Nice update Scott , thanks.
Scott, would love to hear your thoughts on overall increase in global bond yields - most developed nations have seen a large increase in the last year - does it reflect the fact that the overall economy is expanding, does it reflect that these countries have high debt and there is concern on debt and interest levels, other?
If my forecasting record were as poor as the FOMC’s, I would have discontinued forward guidance long ago. On a separate but related issue, anyone who offers a service that is forecast-based is not worth his salt. A good forecaster doesn't need to sell his services. He can become rich just by following his own advice.
I'm not particularly concerned about the increase in bond yields. Current levels seem roughly in line with inflation and growth fundamentals. Furthermore, I don't think government deficits or debts are a significant factor.
The FED''s just tightened the last 4 weeks. That has pushed up yields.
“When interbank demand deposits fall, settlement liquidity tightens.
When settlement liquidity tightens, the liquidity premium rises (short-term liquidity premia rise, interest rate spreads rise). When the liquidity premium rises, interest rates rise — even if the Fed does nothing.”
IBDDs have fallen by 331449b since July 3rd 2025. This is pushing up interest rates in the short-run. So far, we have avoided the “Minsky Moment”
10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity (T10Y3M) | FRED | St. Louis Fed
Velocity has stalled.
Thanks Scott
While the short end rises discounting expected FED tightening, Seems the entirety of the yield curve is reflecting healthy medium/long real growth with anchored inflation expectations. Thoughts?
Current bank credit is growing:
Q2 2026: 6.5% annualized
Q1 2026: 7.1%
Q4 2025: 5.0% pricked the gold market
Q3 2025: 6.0%
Q2 2025: 6.9%
6mo T-bill yields are higher than the IOR rate. This makes bills more attractive than excess reserves. This inverts the historical QE relationship where the IOR was well above 6mo T-bills. This is expansionary, not a sterilized administered rate.
Scott. Any update to your thoughts now that the Fed raised rates?
Under the “floor system” banks would refuse to lend reserves at lower rates. But today 6mo T-bills are higher than the IORB rate. The FED is too easy by its very definition.
The money stock can never be properly managed by any attempt to control the cost of credit. The FED's time horizon is 24 hours rather than 24 months.
Why is not concerning that annual Federal interest burden/GPD is nearly at a record 3.1% last seen in 1990s and will get worse as maturities are rolled over at higher rates. Does it get concerning at 4% or 5% . Thank you.
There's 11 trillion dollars in Federal debt that must be rolled over in 12 months.
I think there is plenty of time before debt becomes a real problem. Meanwhile, if economic growth continues to pick up, the debt burden will lessen. Any attempt to cut or rein in federal spending will automatically work to strengthen the economy. Growth and modest austerity with spending is the best solution to our debt problem.
Yes, bonds are priced to inflation remaining at or slightly below the Fed’s target. If inflation moves lower, as I think it will, the Fed will not have to raise rates as much as the market currently expects and could even lower rates some time next year.
Forward guidance is meaningless; the Fed has rarely provided accurate forward guidance. Their guess is as good as anyone’s.
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