Waiting on the Fed

Stocks opened mixed this morning with no real direction pending the much anticipated Federal Reserve policy announcement later today. Bonds are trading cautiously higher. Investors expect one final .25% interest rate hike by the Fed, and would like to hear something about a pause in monetary tightening.

Economic data are coming in so mixed that it’s tough to discern any real trends. Take, for example, the labor market. The number of open job positions in the US dropped to 9.6 million last month, and has been gradually falling from the March 2022 peak of 12 million. At the same time, layoffs have been gradually rising since December, and number of workers voluntarily quitting jobs has begun to decline. Put all that together and you could reasonably conclude that hiring activity is beginning to soften. Not so fast. We still have 4 million more open positions than we have unemployed people. And today we learned, courtesy of payroll processing company ADP, that the private sector generated another 300k jobs last month, which is twice the figure expected.

Also, we’d really like to know how the biggest part of our economy—the service sector—is faring. But two of the most widely followed business activity surveys don’t necessarily agree. S&P Global says the US service sector is experiencing healthy growth, with business activity accelerating for four straight months after a rough 2022. On the other hand, ISM’s Services PMI suggests activity has been shrinking since October, with a welcome but modest uptick last month. Which is it?

The Federal Reserve’s unenviable job is parse all this data, develop a cohesive picture of the state of the economy and inflation, project it into the future, and adapt  monetary policy to fit. That sounds like a tall order.