Economic Newsletter

On the surface, it would seem the Fed is making a mountain out of a molehill. After all, the unemployment rate, at 4.3 percent in August, is near historic lows, suggesting a healthy job market. But as they say, the devil is in the details. The unemployment rate provides a valuable snapshot of labor market conditions, but it’s a summary measure that masks underlying fissures that may be poised to deepen.

The market turmoil, including a 12 percent drop in stock prices that followed the “Liberation Day” tariff t hreats on April 2 is now in the rear-view mirror. Stocks have since raced to new highs and bond yields have retraced a brief upward climb. One reason for the turnaround is that the extreme tariff hikes announced on that day did not come to pass. They were either postponed, rescinded or lowered through myriad deals with trading partners.

The dog days of summer are upon us, and the controversies over the economy, monetary policy, tariff s, and inflation are heating up. Ask a two-handed economist whether things are looking good, and the answer is likely to be… yes and no.

Investors have also been shaken by the volatile news cycle, but here too the behavior of the financial markets has not been overly dramatic. Stock prices have responded – sometimes violently – to each unwelcome tariff announcement or upheaval on the geopolitical front. Likewise for the bond market where yields have staged some unusually large daily moves

The Tariff Shock A de-escalation of trade tensions is high on the list of what most economists believe is necessary to sustain growth in the U.S. On May 12, they got their wish – sort of. On that day, U.S. trade officials announced a détente with China – the nation’s top adversary in the trade wars – that would temporarily roll back the onerous reciprocal tariffs that had been in effect.

The economy is reeling from multiple shocks, spurring economists to reshape their outlook for growth, inflation, unemployment, monetary policy, and financial markets. The silver lining is that the economy was in good shape ahead of these shocks, with unemployment low, inflation retreating, and the markets retaining most of the strong gains achieved in recent years.

One of the biggest fears among investors, as well as policy makers, is that the economy is flirting with stagflation. There is no definitive measure of this condition, which is broadly thought to exist when the
economy is growing below its potential and inflation is exceeding a certain target, currently 2 percent, for a sustained period of time.

There are still compelling reasons to be optimistic about 2025. Most notably, the job market is churning out paychecks at a sturdy pace, providing households with the firepower to sustain spending. Consumers account for about two-thirds of economic activity, so as long as they keep their wallets open there is little risk that the U.S. will fall into a recession.

In the closing months of 2024, monetary policy took center stage as little was done on the fiscal front during the waning days of the Biden administration. The Fed cut rates three times, totaling a full percentage point, between September and December while congressional efforts were focused on campaigning leading up to national elections.

The Federal Reserve cut interest rates for the third time in its three-month-old easing cycle that started with a robust half- point reduction in September. The latest quarter-point cut won’t be the last according to predictions made at the December-17-18 policy meeting. The question is, are we closer to the beginning or the end of the rate-cutting cycle.

Reflections on the U.S. elections are ongoing and will likely dominate the media for some time to come. That said, the polls are closed, and all eyes are focused on what the ramifications of the incoming Trump administration will be for the U.S. economy.

In the waning days of the summer, things looked dire indeed. The job market was sputtering, consumers were pulling back, and public anxiety was ratcheting up, stoked by mounting geopolitical tensions in the Middle East and the onset of a highly divisive and bitter election campaign.