U.S. economic data has collapsed, and the Federal Reserve is caught in a dilemma.
The U.S. economic data has collapsed. The U.S. just released the non-farm employment data for July, which is 73,000, significantly lower than the expected 104,000. What does 73,000 represent? In the past, during good economic times, the non-farm employment data would show an increase of 200,000 to 300,000 in a single month. This year, the overall data has declined by about 150,000, but now it has been directly halved.
Moreover, in the minds of institutions on Wall Street, 100,000 is a warning line, meaning that if data is above 100,000, it can be said to be a 'soft landing' for the economy, and then it slows down. But when the data falls below 100,000, the 'recession' label can be attached to it.
Looking at this along with another matter further amplifies this feeling. Today is August 1st, the deadline for the second exemption period of Trump's reciprocal tariffs. In fact, they have already announced tariffs on various countries, whether they've signed agreements or not. But have you noticed? It’s surprisingly quiet. According to Trump's usual style, he should be shouting so that the whole world knows about the many agreements reached.
But why hasn’t he been shouting this time? It’s now clear, because the economic data is too poor. Not just non-farm data, but last night's inflation data, the core PCE also significantly exceeded expectations, with inflation year-on-year increasing by 2.8%. Isn’t it said that raising tariffs can benefit the economy? Why is inflation high, employment collapsing, where is the benefit? So Trump has also stopped shouting. Now it appears that Trump is dodging the blame for the economic recession. But Powell, I’m afraid, can’t escape.
Just two days ago, at the Federal Reserve's July meeting, Powell personally stated that the current restrictive monetary policy, which means not cutting rates, is due to high inflation and relatively good economic data, so it can withstand. High inflation is indeed a fact, but claiming that the economy is doing well based on this non-farm data is untenable.
And if in a couple of days Trump suddenly turns around and says to Powell: 'You see, I said I wanted to cut interest rates, it’s because you refuse to lower them that the economy has turned out this way.' Then it’s hard to say whether old Powell can last until the end of his term.
After the non-farm data was released, the expectation for the Federal Reserve to cut interest rates in September has surged back from 39% to 63%. However, this time cutting rates may not be good news for the U.S. stock market. Because cutting rates when the economy is doing well is called taking precautions. Everyone's focus is on continuous liquidity easing, but if the economy is bad and then rates are cut, that’s called closing the barn door after the horse has bolted. People's attention will shift to the economic recession.
Currently, the U.S. not only has an economic recession but also an inflation problem; these two combined are called stagflation. This dilemma is enough to keep the Federal Reserve busy.
Moreover, during the most exaggerated times, the non-farm data for May and June was significantly revised downwards. By how much? Just to give you a sense, May was revised down from 144,000 to 19,000, and June was revised down from 147,000 to 14,000. Didn't that just disappear? Such a large revision makes it hard not to raise suspicions.
