Oxford Economics chief economist Ryan Sweet joins Seana Smith and Brad Smith on Morning Brief to discuss weekly jobless claims released Thursday morning and what it means for next week’s expectations for interest rate cuts from the Federal Reserve.
Initial jobless claims came in at 230,000, a 2,000 increase from the previous week’s level and above expectations, as the average estimate was 227,000.
Jobless claims were “below that break-even level, which is consistent with no monthly job growth,” Sweet said, noting that in his view, this is “a good sign for the Fed that even though the labor market has risen, it's not because of a lot of layoffs,” which is “an encouraging sign" for officials ahead of the September FOMC meeting.
Sweet says labor market data is a “slam dunk” that the Fed will cut 25 basis points next week. He believes that while Fed officials will likely be on the same page about the first cut given this week’s economic data, Sweet expects “a lively discussion” about whether the subsequent cuts are 25 or 50 basis points.
August producer price index data coming in slightly hotter than expected on a monthly basis while July's data was revised to the downside. Meanwhile, on the employment front, weekly US jobless claims coming in at 230,000. That's above the estimate for 227,000. Joining us now to break down what this means for the Federal Reserve and the economy, we've got Ryan Sweet, who is the Oxford Economics chief economist. Great to have you here on set with us today.
Oh, thank you for having me.
Absolutely. So, I mean, let's break this down because it's more than just these data points that we're getting here today on producer price index coming after. We got CPI coming in largely in line with expectations earlier this week. And then, of course, thinking back to the employment situation last week, that really sent the market into a little bit of a tail spin, it seems. So, we're getting a little bit more pulse pulsing news from at least jobless claims at this juncture. But how much does that move the discussion for the Fed at this point?
Not too much, but initial jobless claims is my favorite economic indicator. Outside of hurricanes and strikes, it typically doesn't send false signals.
Why is that?
Because it provides a pretty quick and real-time look at the state of the labor market. And the key catalyst or the causal relationship between a rising unemployment rate and a recession are layoffs. And that's what jobless claims are measuring, the number of people that are filing for unemployment insurance benefits. And right now, they're still pretty low. They're below that break even level, which is consistent with no monthly job growth. So, I think this is a good sign for the Fed that, you know, even though the labor market has risen, it's not because of a lot of layoffs. And I think that's an encouraging sign for them.
So then what does that tell us about the Fed when we do see some of this softening that we have seen in the labor market? Does it warrant Fed action?
Oh, it does. It's a slam dunk that they're going to cut next week, and it's going to be 25 basis points in our view. I think it's going to be, you know, there's not going to be any dissents. I think they're all going to be on the same page for the first cut. And then in subsequent meetings, it's going to be a little bit more of a lively discussion about whether or not they go 25 or 50, but they need to get this party started. They need to start cutting interest rates, kind of ease their foot off the brake to engineer this soft landing. On the inflation front, as you referenced with the PPI this morning, you know, mapping it with the CPI, the PC deflator is going to come in pretty soft on in August. And you know, you don't want to ever say mission accomplished when it comes to inflation, but the Fed is very close to mission accomplished.
And so how does that set up, if we're close to mission accomplished, how does that set up with the pathway for those cuts might look like from your perspective?
So our current baseline is a cut every other meeting until they get back down to the neutral rate, which, you know, no one really knows where the neutral rate is until you get there. Uh but I think the Fed can clearly lay out that we're going to be, you know, meticulous about cutting interest rates. You know, they're going to pause if they need to with the inflation data because one thing to keep out look out for is that the comparisons get a little bit more difficult going forward. Uh but in the end, if you look through kind of like the vagaries of the data, inflation's getting back down to their target in short order.
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This post was written by Naomi Buchanan.