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It's normal to be nervous when your plane is near the ground. The tranquility of the sky and clouds is swiftly replaced with concrete zooming past you and the sensation of your stomach dropping.
With less than a week to go before the Fed implicitly declares an improbable “soft landing,” the final descent and last-minute inflation data are still managing to keep the investors guessing — and looking across the aisle at each other.
The fear isn't irrational. Over half of aviation accidents over the last 20 years happened in the landing phase, according to Airbus, and every investor knows that the economic equivalent is just as fraught.
A double dose of inflation readings this week strengthened the case that pricing pressures are easing down to the Fed’s 2% target. But even as some metrics registered hotter than expected, the risks of a labor market slowdown are weighing more heavily on central bankers. The years-long battle to tame inflation has taken a back seat to concerns over keeping Americans employed.
“Now that we’ve seen four consecutive months of good news on inflation, (coming off three bad reports) the Fed now has to keep up the other side of their mandate — full employment,” Gina Bolvin, president of Bolvin Wealth Management Group, told Yahoo Finance. “The job market will continue to be an influencer.”
Last month’s jobs report seemed to calm the worst fears of labor market trouble while still stoking worries that a summer slowdown could serve as a preview of things to come. Employers added fewer jobs than expected in August. And revisions to the June and July labor reports showed the US economy added fewer jobs than initially thought.
“Improving inflation trends give the Fed the leeway to focus more on full employment, the other side of their dual mandate,” said Jeffrey Roach, chief economist for LPL Financial.
“The fragile job market bolsters the expectation that the Fed will pivot away from an inflation preoccupation.”
On Wednesday the government reported the Consumer Price Index (CPI) in August rose at the slowest pace in three years on an annual basis. The mild rise of 2.5% was followed by another encouraging report on Thursday, which showed wholesale prices mostly cooling compared to a year ago. The Producer Price Index revealed prices climbed 1.7% in August, the smallest 12-month rise since February.
But pulling down inflation is still paramount to the Fed, which can't afford to shift its attention from that instrument panel just yet.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
The CPI report notably flashed an unexpected rise of "core" month-over-month inflation, which experts attributed to service costs building up over years and stubborn housing prices. Still, the Fed is not expected to relent in cutting rates next week despite the stickiness of some categories, said Roach.
“Inflation and the job market are both prodding the Fed to lower rates. Inflation’s a less compelling argument for high rates, and the softening job market is a more compelling argument against them,” said Bill Adams, chief economist for Comerica Bank.
That the Fed is widely expected to lower rates by a traditional 25 basis points, rather than a more drastic 50 basis points, speaks to the two-sided struggle that central bankers are now engaged in. Inflation is headed in the right direction, but not fully resolved. Meanwhile, signs of labor market deterioration are present without signals of a significant downturn.
The balancing act between the Fed’s two mandates has other dimensions. Calling for a half-percentage-point cut could prompt Wall Street to panic. Pessimists would see the more severe move as an admission that policymakers were too slow to act before a potential recession.
If the Fed was reluctant to stem accelerating price increases in the COVID era — drawing earlier criticism of inviting historic inflation— officials are likely not to hesitate to protect a snowballing labor market in the aftermath. But the risks now are two-sided. On the cusp of a new rate-cutting cycle, moderation is the word of the day.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban.
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