Earlier today I heard a CNBC commentator discussing today’s stock price drop. He said something along the lines of, “It’s all about the Fed.” It’s rare that there is a day when so little was about the Fed. Yes, higher interest rates played a role in lower stock prices, but these interest rate moves had nothing to do with the Fed.
There was no Fed meeting today and no major speeches. Instead, rates shot up after a strong jobs report. As you can imagine, rates are influenced by various factors. The Fisher effect and income effects influence the equilibrium interest rate. Moreover, the Fed has some ability to push short-term interest rates above or below the equilibrium interest rate. Today’s jobs report likely led to slightly higher expected nominal GDP growth (both higher inflation and higher real growth). That’s why rates rose – it had nothing to do with the Fed, at least not in the way most people think about Fed policy. . (You could argue that the strong growth is partly a reflection of earlier Fed stimulus, but that’s obviously not what the reporter meant.)
Some people say rates rose in anticipation of future Fed rate hikes. That’s putting the cart before the horse. Expectations about future Fed Funds rates rose as market rates rose today. The Fed largely follows the market.
Today’s jobs report also revised some previous reports. The peak unemployment rate in 2024 was revised downwards from 4.3% to 4.2%, making a “mini-recession” less likely. (I define a mini-recession as an increase in the unemployment rate of at least one percentage point.) The cyclical low for unemployment was 3.4%, so it would have to reach 4.4% to rise enough for me to consider it as a can consider a mini-recession. –recession. When the unemployment rate was reported at 4.3% last summer, I thought this outcome was very likely to occur; now I’m much less sure. At the same time, I am increasingly less confident that the Fed has inflation under control. These two issues are related, as the Fed tries to walk a fine line between too little NGDP (which risks recession) and too much NGDP (which leads to high inflation).
In summary, the soft landing hypothesis is still quite plausible, but not certain. If inflation falls below 2.5% in 2025 and unemployment remains low, I would consider that a soft landing: three years of very low unemployment and low inflation. It would be the first soft landing in American history. A trade war would make a soft landing more difficult. As always, a NGDP growth rate of 4% makes a good outcome more likely. My suspicion is that we won’t land at all in 2025; inflation will remain high due to high NGDP growth. I hope I’m wrong.