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Why is the Fed calling for caution to fight inflation while planning to cut interest rates twice?
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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange]: Why is the Federal Reserve calling for caution to fight inflation while planning to lower interest rates twice?" Hope it will be helpful to you! The original content is as follows:
During the Asian and European trading session on Tuesday, the US dollar index rebounded slightly and rose 0.12%, trading around 97.40. The US dollar index fell 0.36% on Monday, ending the three consecutive rebounds in the recent rebound. Westpac analysts wrote in a research note: "As several Fed officials recommend a more cautious attitude towards the rate cut cycle and emphasize that the risk of upward inflation remains, the Federal Reserve's contradictory statement has caused US Treasury yields to rise slightly, indicating that some investors have withdrawn their expectations for the Fed's rate cut in October.
St. Louis Fed Chairman Alberto Mousalem said early this morning that the central bank "should be cautious" because its policy interest rates that consider inflation may have approached neutral.
Atlanta Fed Chairman Rafael Bostic said in an interview with the Wall Street Journal that the focus needs to continue to be on ensuring inflation returns to the Fed's 2% target from the current level of about one percentage point higher, and no further rate cuts are needed this year.
Cleveland Fed Chairman Beth Hamak also said that the Fed "should be very cautious in lifting monetary policy restrictions." Neither Bostic nor Hamak voted on Fed policy this year.
So why did the Fed finally hold a meeting to vote and most people believe that interest rate cuts will need to be cut twice this year?
The power of small business recruitment engine is gradually weakening, which may be one of the important reasons.
In August, the proportion of small businesses that have not filled vacancies fell to 32% xn--xm-6d1dw86k.compared with the previous month, reaching the lowest level since July 2020. The warning signal here is clear.
The main road enterprises (i.e. the core entity of the US "main road economy", known for providing anti-cyclical and stable jobs) are no longer employment in the United StatesThe dominant force of growth. This is a sign of concern for the overall health of the labor market.
The American Federation of Independent Businesses (NFIB) monthly survey showed that the proportion of small businesses that had unfilled vacancies in August fell to 32% from the previous month, hitting the lowest level since July 2020. The reason why this phenomenon is worrying is that more than half of the new jobs in the US economy in recent years have been due to the strong recruitment momentum of small xn--xm-6d1dw86k.companies.
The latest Vacancy and Labor Movement Survey (JOLTS) data also outlines the concerns. Fundstrat macro data scientist MaxMotz pointed out that from June to July, the net recruitment of small businesses (less than 250 employees) (new recruitment minus layoffs and voluntary resignations) lags behind large businesses. The last time this situation of two consecutive months was in May 2020.
If small businesses and their recruitment activities are lost, the already fragile economic growth may face the risk of a decline. Research released by the Chicago Fed in August shows that the root cause is that jobs created by small businesses are less sensitive to economic cycles than large businesses.
Small businesses are deeply bound to the local economy and are not responsible to shareholders. They do not have to lay off employees to demonstrate cost-saving results and push up short-term stock prices; at the same time, small businesses often lack positions that are easy to pass training, and the xn--xm-6d1dw86k.company is small, and it may also be mixed with favorable considerations when firing colleagues.
Large enterprises are xn--xm-6d1dw86k.completely different. At least from the economic environment from March 2020 to the present, once any signs of turmoil appear, large xn--xm-6d1dw86k.companies will respond more quickly and tend to lay off employees.
U.S. employment may be significantly weaker than expected, supporting the Fed's easing policy
Feder researchers pointed out that when the unemployment rate is at a high level (usually implying that the economy may have entered a contraction stage), the advantage of large enterprises in the scale of new employment will be weaker than small enterprises; but in the current stage of low unemployment rate, the performance of large enterprises in new employment may "overtake" small enterprises.
In the current economic environment, the concern of this situation is that if a recession hits, a larger proportion of the labor force is concentrated in employment in large enterprises. Researchers believe that this is very likely to "amplify the scale of unemployment" and put the economy in an extremely fragile situation.
The recent reversal of the recruitment pace of small businesses has broken a landmark feature of the economy in the post-epidemic era.
The U.S. Bureau of Labor Statistics (BLS) data shows that from the beginning of 2021 to the second quarter of 2024, small businesses set off a round of recruitment boom, and about 53% of the new net jobs in the United States contributed by them.
It is precisely with the recruitment vitality of small businesses that the U.S. economy continues to operate. But since then, labor market growth has slowed sharply, which has also affected the Federal Reserve's decision last week - implementing a 25 basis point rate cut under the "risk management" framework. However, the effect of interest rate cuts is limited: monetary policy easingThe benefits brought may take several months to spread to small businesses, allowing them to feel the actual relief effects.
NFIB data shows that 81% of small businesses in August who had recruitment demand said that their vacancies had “little or no qualified applicants, or even no”.
The situation in the construction industry is particularly severe, with nearly half of small businesses saying there are unfilled job vacancies; while the manufacturing and transportation industries, as the core pillars of the US economy, are also facing recruitment difficulties.
Some of the reason may be due to labor quality issues – more than 20% of small business owners list it as their "priority problem". This may not only mean that the employer has received few qualified applications, but it may also be that the local labor force with corresponding qualifications is insufficient.
The repayment pressure brought by high interest rates restricts the labor market
These small businesses are unable to afford the same salary level as large xn--xm-6d1dw86k.companies, so they are difficult to attract suitable employees.
From the perspective of financial pressure, Equifax data shows that the loan scale of small enterprises that are overdue for 90 days or more has exceeded the highs in 2020 and 2021, and the default rate has slightly climbed to exceed the peak in the early stages of the new crown epidemic.
If you leave the current difficulties faced by xn--xm-6d1dw86k.community stores, local construction xn--xm-6d1dw86k.companies and other main road xn--xm-6d1dw86k.companies, the consequences will not only affect each xn--xm-6d1dw86k.community, but also affect the entire US economy.
The market suspects that the Fed's interest rate cut was caused by pressure from the US president
New Fed Director Stephen Milan said on Monday that the Fed misunderstood the degree of its monetary policy tightening. If there is no significant cut, it will put the job market at risk.
At the same time, Milan said that Trump never asked him to formulate policies in a specific way, and that he would listen to Trump's policy views, consider his arguments, and then make decisions on his own.
Feder Chairman Jerome Powell will speak on the economic outlook in the early hours of Wednesday.
Summary:
We can continue to analyze the speeches of Powell and subsequent Federal Reserve officials tonight, while the data continues to pay attention to the release of the core PCE, GDP data for the US on Thursday this week and the release of core PCE data for the US in August on Friday.
As analyzed in the previous article, the US dollar index is technically suppressed by the moving average and the upper edge of the box 97.50. The MACD and RSI indicators are still dominated by the bears. If the US dollar index wants to change from a rebound trend to an upward trend, it needs to rise to around 98.50 and break through the neckline of the upper box and head and shoulders tops.
The above content is all about "[XM Forex]: Why is the Fed calling for caution to fight inflation while planning to reduce interest rates twice?", which was carefully xn--xm-6d1dw86k.compiled and edited by the editor of XM Forex. I hope it will be helpful to your transactions! Thanks for the support!
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