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NOT SHOCKING

Federal Reserve Chairman Jerome Powell came out today and announced that the Fed does not need to be in a hurry to lower interest rates. This signaling is further evidence that the Fed is going to be both patient and data dependent before making any changes to their interest rate strategy. As Powell continued in his testimony, he did comment that the economy remains strong, and the labor market remains solid.

Fed Chair Powell described the labor market as being “broadly in balance” and while there are job openings to meet current job seekers, the number of jobs available is less robust than it has been in the recent past. It is the labor market, we believe, that will be the key factor in changing the Fed’s stance on adjusting the Federal Funds Rate. In the most recent release of employment statistics, unemployment ticked down 0.1% to 4.0% and underemployment remained unchanged at 7.5%[1]. We noted that the change in nonfarm payrolls declined from 307,000 jobs in December 2024 to 143,000 jobs in 2025[1]. Essentially, the labor market is not seemingly in high trouble, it is just a little less robust than it was a year ago.

Interestingly enough, the labor participation rate actually ticked up to 62.6%, up 0.1% from its’ last reading[1]. This means that the unemployment rate declined while more people were in the labor market. In the aggregate, this is a very good thing because people are coming off the sidelines to take open positions and this is certainly a factor in absorbing some of the open jobs. I have written numerous times about how late the Fed was to the ”transitory inflation” party. It is my hope that the Fed does not wait too long to combat a significant weakening in the labor market. We are watching job creation and the unemployment rate as two important statistics to help decipher the direction of the labor market.

The Bloomberg 500 index is up 3.6% since the beginning of the year but has been fairly sideways over the last two weeks as the Trump tariffs have been announced1. As we look at the 10-year Treasury note, the yield was 4.57% coming into 2025, peaked at 4.79% on January 14th, and is 4.54% as I write this on February 11th[1]. Overall, the bond market will continue to fight a tug of war between inflation and a slowing economy due to tariffs and labor market issues. If inflation heats up, we could see rates rise higher, but we still feel 5% is the upper boundary on the 10-year treasury note, unless there is evidence of structural inflation. Tariffs can certainly influence prices, but it is important to recognize that tariffs can be relaxed just as quickly as they are enacted. We continue to monitor the employment market and consumer spending to help us decipher the general economic direction of the country. We sort of knew a Trump presidency would be rife with pronouncements and changes, and he has certainly lived up to that expectation!

[1] Source: Bloomberg

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