The Fed’s dual mandate is causing bifurcations in policy

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Last week’s macro super bowl, as we called it in our most recent Forward Guidance roundup, certainly lived up to expectations of fireworks. 

Just look at how much the market’s odds for a September rate cut have whipsawed:

Source: CME Group

That initial dip was caused by some pretty nasty PCE data that put into question the path of monetary policy. As seen in the chart below, inflation seems to be heading above the Fed’s 2% target:

Source: MacroMicro.me

More importantly, goods are now driving the inflation uptick, as opposed to the last two years, where most of the sticky inflation has been related to services. 

Core goods spent much of the last year in a slump, even dipping into deflation for a time. What’s concerning now is that the recent rise appears tied to tariff-driven price hikes.

So that was the baseline heading into the FOMC meeting. 

But then…we got the jobs report. And it was a disaster of a print. So much so that Trump went off and fired the commissioner of the Bureau of Labor Statistics!

The primary catalyst that led to the repricing of rate cut odds for September were the huge revisions to the amount of jobs created in the last couple of months:

Source: MacroMicro.me

All of a sudden, everyone came to the realization that the labor market is at stall-speed and at risk of meaningfully deteriorating. 

So where does that leave us now in terms of how the Fed is thinking about its dual mandate? Fragmented, to say the least. 

On one hand, the labor market is screaming for a resumption of the rate-cutting cycle. On the other, inflation looks to be accelerating higher without having ever tapped the Fed’s 2% inflation target.

With this bifurcation in mind, it’s no surprise that we’ve seen the first two governor dissents at the Fed in 30 years:

Source: zerohedge

Looking forward, all eyes will be on the Jackson Hole Symposium in August. Powell is likely to provide forward guidance (pun intended) on the Fed’s plans for a September rate cut. If this sounds similar to the situation we had last summer (where this exact situation occurred regarding labor market weakness leading to guidance of a September cut), that’s because it is. 

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