Dancing with Data

Imagine the Federal Reserve as a skilled dancer, gracefully navigating the dance floor of the economy.  Right now, they’re performing a delicate waltz, trying to keep in step with a weakening labor market and persistent inflation that refuses to approach their two percent target. Recent labor data show the unemployment rate has risen to 4.2 percent in November 2024, up from 4.1 percent the previous month.  Employment levels have dropped by 355,000 according to the Bureau of Labor Statistic’s household survey, and the labor force participation rate has edged down to 62.5 percent, potentially signaling a broader cooling trend in the job market.  Despite a modest increase in nonfarm payrolls, industries like retail trade are losing jobs (down 62,000 in the past six months), and part-time employment for economic reasons has risen to 4.5 million, up from 4 million a year ago.

As the Fed continues its dance, inflation remains a stubborn partner. The Consumer Price Index (CPI) rose by 2.7 percent year-over-year in November, slightly higher than October’s 2.6 percent. Core inflation measures also indicate persistent price pressures, with shelter costs playing a significant role in recent increases.  While inflation has moderated from its peak during the pandemic recovery period, it remains sticky, posing challenges for the Fed as they try to stabilize prices without exacerbating labor market weaknesses.

In response to these dynamics, the Federal Reserve implemented its third consecutive rate cut at its December meeting, reducing the federal funds rate to a range of 4.25-4.50 percent.  This marks a shift from their aggressive tightening cycle over the past two years.  However, the Fed faces a complex balancing act: easing monetary policy too quickly risks reigniting inflationary pressures, while moving too slowly could deepen labor market challenges.  As they adjust their policy stance, the Fed must carefully weigh these competing risks while maintaining flexibility to respond to evolving economic conditions.  The Fed has remained relatively graceful throughout the post-covid era.  Let’s hope they don’t change the music to which they are dancing.  If the wrong tune comes on, they may turn to break dancing, and that could have a deleterious impact on the overall economy.