Fed officials are pausing to see what they've done to the economy. It's unlikely they'll learn something new

The author asks what the Federal Reserve could learn about the economy in six weeks that it doesn't already know.

Fed officials are pausing to see what they've done to the economy. It's unlikely they'll learn something new

New York CNN

Confession: I'm not a huge basketball fan. When March Madness rolls around, I'm glued to the screens. Even if my brackets are busted by day one.

I love games when a team that is 20 points down makes a miraculous recovery to get within a few point with only seconds left.

Coaches who are wise will reserve one of their four timeouts for these moments. Coaches and players are huddled together in chaos while the head coach makes what could be his final play of the year.

The game continues. The game resumes.

The Federal Reserve took a timeout on Wednesday to plan its strategy for the July decision about whether or not to raise interest rates. But I am skeptical that it will be able to make a buzzer beater shot when the game resumes.

Powell's Justification for the Pause

Fed officials took their first break from raising interest rates after hiking them 10 times in the last 15 months.

Jerome Powell, the chair of the monetary policy Committee, said that they decided to give themselves more time to assess the full impact the rate increases by the central bank have had on the economic situation.

He said that the Fed will have more time to observe the effects of the recent banking turmoil.

Powell stated that the Fed is now at a critical point, where raising rates too much or too little has the same risks as leaving them too low.

This is a very ugly situation.

Businesses and consumers may cut back so much on their spending that they are forced to lay off large numbers of employees. This could trigger a recession if the Fed increases rates too high.

If the Fed does not raise rates high enough it may never achieve its 2% inflation target. This is because the Fed would not have a good reason to raise rates high enough. If it did, inflation could never reach its 2% target.

I can understand why the Fed would act as a prudent coach in a situation of high stakes. At the same, I can't imagine what the Fed would learn about the economy that it didn't already know in six weeks.

The labor market has cooled, but only slightly

The Fed will also be evaluating the latest employment statistics before its meeting on July 25 and 26.

If there isn't another pandemic to shut down the economy, then I don’t think that the Fed would be able to see any cracks that are so deep that it would make them think twice before raising rates again.

The data from the monthly jobs report exceeds expectations of economists every month.

The economists had predicted 190,000 jobs last month. This would have markedly decreased from April's 294,000 new jobs. To the surprise of many, however, the Bureau of Labor Statistics revealed that employers had hired 339,000 workers.

Employers have hired an average of 314,000 new employees per month since the beginning of this year. This is down from the average monthly number of 400,000 jobs last year.

The weekly unemployment claims are beginning to reflect the tiny, but growing cracks that have begun to appear in the labor markets.

The number of Americans applying for unemployment benefits last weekend remained at its highest level since October 20, 21. The Fed won't be surprised if, between now and its next meeting, the weekly data on jobless benefits shows that more people have applied for unemployment.

The signs of a cooling labour market appear a year after Fed tightening cycle began in March 2022. This is not a mere coincidence. Economists argue that it takes at least a year for the Fed's actions to be felt in the economy.

The Fed will also pay close attention to new data on wages and job openings.

Powell has repeatedly stated that he wants the number of unemployed people to decrease. This would put downward pressure on wages which have been rising as employers struggle to fill vacancies. Employers who raise wages give people more money to spend, which in turn allows businesses to raise prices.

Powell's dream came true in March. The number of job openings dropped to its lowest level in almost two years. The ratio between the number of Americans with jobs and those without jobs dropped to 1,67. This was the third consecutive month that job openings declined.

Initial estimates from BLS's Job Openings and Labor Turnover Survey show that the ratio increased to 1.79 in April when unexpectedly, job openings rose.

The Fed has a valid reason for wanting more time to consider before deciding on interest rates. It's difficult to imagine that the Fed will have a better understanding of the current situation if job openings change that dramatically in a month.

The Employment Cost Index will be a key source of information on wages. The Fed will not have this data available at its meeting in July, as it won't be released until two days after the meeting. The BLS confirmed to CNN the Fed will not receive any advance information prior to the release of the report to the public.

According to the latest ECI report, wages increased by 1.2% during the first quarter of this year. This is a slight drop from the peak of 1.4% in September 2021.

If the ECI report shows the same increase in hourly earnings as the monthly unemployment report, then it is safe to assume that wage growth will continue in the second quarter.

The last missing piece of the puzzle

The Fed will also have to review the inflation data for the month of August, in addition to the second-quarter GDP figures due by the end of the month.

Inflation took an entire year to reach this point. Six weeks won't make a difference.

The Fed, unlike the college basketball team is not down by two points and has a good chance of winning the game once it resumes. Team Fed has caught up to its opponent but there is still a long way to go.

They could save some timeouts to the end.