By LFDE
In the meantime, the famous 2% target now seems within reach in both the USA and the Eurozone. In August, German inflation stood at exactly 2.0% year-on-year; in France at 1.9%, but at 2.2% for the Eurozone as a whole. In the United States, PCE inflation, the Fed’s preferred measure, showed inflation at 2.5%. Admittedly, core inflation measures are a little higher, but the trend is similar. And inflation surprises, calculated by Citigroup, are in negative territory, a sign that economists have been underestimating the speed of the decline for some months now.
As Chairman Jerome Powell stated at the Jackson Hole summit at the end of August, ” the time has come for an adjustment in strategy “. The Fed will therefore pivot, i.e. initiate a rate-cutting phase at its next meeting on September 18. But this statement is certainly deliberately ambivalent, since ” adjusting strategy ” also implies a shift in the Fed’s priority objective.
Indeed, its mandate is threefold: price stability, full employment and moderate long-term interest rates. With inflation easing, the Federal Reserve can now focus on maintaining a strong labor market. And that’s just as well, because in the United States, fragilities are appearing. With job vacancies drying up, temporary work declining and youth unemployment on the rise, tensions hitherto perceptible beneath the surface are now clearly visible. Unemployment, which stood at 4.3% in July, has triggered what experts call Sahm’s rule: when the average unemployment rate over the last three months is 0.5% higher than its lowest level over the last twelve months, the United States has systematically experienced a recession in its wake. This has been the rule for the past 80 years. The deterioration in the unemployment rate has now materialized the crossing of this threshold – a worrying development for the Fed and the markets in view of the turbulence experienced at the beginning of August. It should be pointed out, however, that the Sahm rule is merely a historical statistic reflecting a rapid deterioration in the job market. It is by no means an implacable mechanism destined to repeat itself. Moreover, hasn’t the inversion of the yield curve, also considered a precursor of recession, been sending out a false signal for 2 years now?
The markets are therefore entering a new phase, in which vigorous economic activity, and employment in particular, will prevail. As far as monetary policy is concerned, the question is no longer “when will the pivot be? but “how much further down? Central banks now have their finger on the trigger, and it’s up to investors to anticipate their rate of fire.
