Fed’s Hand Is Forced by Jobs Revisions
A series of dismal employment readings leaves Chairman Powell with little choice at the upcoming FOMC meeting.
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Investors have had to endure a string of dismal jobs readings in recent weeks. This included a big miss with last Friday’s August jobs reading with more downward revisions for original June and July employment projections. Then on Tuesday, the Bureau of Labor Statistics revised down its job creation estimate for March 2024 through March 2025 by a whopping 911,000 positions. This followed a huge 818,000 downward revision in August of 2024.
Combined with more than 200,000 jobs revisions late in the summer of 2023, this means some two million positions have disappeared over the past three annual revisions. All this shows, I believe, the administration was right in firing the head of the BLS recently, as this group hasn’t been able to get its projections even near the ballpark in recent years. These revisions also show that the economy has been much weaker in recent years than originally reported. A topic my regular readers know I have pounded on consistently and frequently for a while now.
To cut the BLS a bit of slack, there are some recent factors that probably make forecasts more complex than in the past. We have seen a huge rise in the "gig" economy in recent years. In addition, the U.S. had an unprecedented surge of immigration from 2021 to 2024 and now has seen a complete 180-degree turn on that front in 2025. Before yesterday’s revisions, foreign-born workers had dropped by over 800,000 positions over the prior 12 months while native born Americans gained more than 2.7 million jobs. I do agree with Wolf Street that revisions should be done quarterly and not yearly going forward, which would keep revisions from being so large and also be timelier.
With the revisions, job creation from March 2024 to March 2025 averaged just under 75,000 jobs created a month. That's in line with an economy that is just bumping along at best. The jobs numbers will also face an additional headwind in the months ahead as well. Federal employees who took buyouts early this year and have not found work or retired will start to show up in the unemployment numbers starting in October.
Futures are still pricing in a quarter-point reduction to the Fed Funds rate next week with a slight possibility of a half-percentage-point rate cut. Although I expect the political pressure to do a half a point reduction to ramp up substantially over the next week. The question is what if any impact this will have on the larger economy. A lot of the positive effects of this cut have already been baked into the markets. Yields on the 10-Year Treasury have already dropped from a 2025 high of 4.8% to a current 4.1%. Average mortgage rates have moved down to their lowest levels since last October.
The bigger question is what impact a lower Fed Funds rate has on inflation, which has proven to be quite sticky in recent months. In addition, falling rates will be a headwind to the dollar which already has dropped more than 10% this year again major currencies.
We will find out those answers together in the coming months as the Fed’s hand is forced at this point. What all this adds up to me in an increasing probability of a Stagflation scenario. Something that is definitely not priced into the markets which continue to trade right at all-time highs.
At the time of publication, Jensen had no position in any security mentioned.
