Employment still in a 'slow bleed' status, says MacroPolicy Perspectives' Julia Coronado

Key Concepts

• FOMC: Federal Open Market Committee – the body within the Federal Reserve System that sets monetary policy.
• Fed Funds Rate: The target interest rate that the Federal Reserve sets for commercial banks to lend reserves to each other overnight.
• Dual Mandate: The Federal Reserve’s goal of achieving both maximum employment and stable prices.
• K-Shaped Economy: An economic recovery where different groups experience very different outcomes, with some thriving while others struggle.
• Labor Market Conditions: The state of employment, unemployment, wage growth, and job openings.
• Inflation Stickiness: The persistence of inflation at a higher-than-desired level.
• Financial Conditions: A broad measure of the availability and cost of credit, impacting economic activity.

Macroeconomic Outlook & Potential Fed Policy Shifts

The discussion centers around the potential for Federal Reserve interest rate cuts in the coming year, influenced by both economic data and the possibility of a change in Fed leadership. Initially, Julia Coronado of Macro Policy Perspectives suggested that rate cuts were more likely under a new Fed Chair appointed by the President. However, recent data, specifically the Conference Board’s consumer confidence numbers, are prompting a reassessment of this view.

Labor Market Assessment & Unemployment: Coronado emphasizes the Conference Board’s assessments of labor market conditions as a reliable indicator. The data suggests a “slow bleed” in the labor market, with the unemployment rate drifting higher and demand for workers lagging behind supply. This is consistent with slowing wage growth. She notes that while stabilization is possible, it may be premature to assume it has already occurred, stating, “Labor market conditions are, you know, not great.” This assessment aligns with her forecast of an upward drift in the unemployment rate.

Data Supporting Rate Cuts: The Conference Board data supports Coronado’s baseline forecast of an upward drift in unemployment, which she believes would justify one or two rate cuts as the year progresses. This justification is contingent on inflation remaining stable or potentially decreasing in the second half of the year. She clarifies that this potential for cuts isn’t necessarily a political influence, but rather a response to weakening labor market indicators. “If we realize the upward drift in the unemployment rate, a cut or two is justified.”

Political Context & Powell’s Position: The discussion acknowledges the political pressures surrounding the Fed Chair position. The subpoena and potential indictment of a figure involved with the Fed initially threatened Chair Powell’s position. However, Coronado suggests this pressure has backfired, potentially strengthening Powell’s standing and leading to greater institutional protection and stability within the FOMC. She believes the odds of Powell remaining in his role have increased.

Shifting Economic Narratives & the “Running Hot” Debate

Prior to the recent data release, the dominant narrative focused on the economy “running hot,” with inflation remaining at 3% and GDP growth at 5.5% (as estimated by the Atlanta Fed). This raised concerns about the need to maintain higher interest rates. However, the new data, particularly regarding the labor market, is prompting a shift in perspective.

The Labor Market vs. Headline Numbers: Coronado argues that the “running hot” assessment is largely driven by financial conditions and the performance of sectors like AI. She highlights a “K-shaped economy,” where the stock market and AI-related industries are thriving, while the average consumer is facing financial strain. Wage growth is barely outpacing inflation, and consumer spending is becoming more price-sensitive, as evidenced by a decline in auto sales in the fourth quarter of the previous year. Automakers are anticipating a budget-conscious consumer in 2026.

FOMC Baseline & Potential for Deference: Coronado notes that the FOMC’s baseline forecast already leans towards either no cuts or one to two cuts, depending on data performance. She suggests that a new Fed Chair, potentially more inclined towards easing monetary policy, could encounter a committee willing to be “somewhat deferential” to that leadership.

Consumer Confidence & Economic Disparities

The Conference Board’s consumer confidence numbers are presented as valuable for assessing labor market conditions. While overall confidence may not directly translate into spending, the assessments of the labor market provide crucial insights. The data reveals a disparity in economic experiences, supporting the concept of a K-shaped economy.

K-Shaped Economy Explained: The average consumer is experiencing limited wage growth and feeling the pressure of inflation. This contrasts with the positive performance of the stock market and AI-driven sectors. This divergence is illustrated by the decline in auto sales, indicating that consumers are becoming more cautious with their spending. Coronado states, “For the average consumer who is depending on their labor income to finance their spending…” the economic situation is challenging.

Synthesis & Main Takeaways

The conversation highlights a dynamic shift in the macroeconomic outlook. While concerns about persistent inflation and strong GDP growth initially suggested a need for stable or even higher interest rates, recent labor market data is prompting a reassessment. Julia Coronado argues that a weakening labor market, characterized by rising unemployment and slowing wage growth, could justify one or two rate cuts this year, regardless of who leads the Federal Reserve. The political context surrounding the Fed Chair position is also evolving, with Chair Powell’s prospects appearing stronger. Ultimately, the discussion underscores the importance of closely monitoring labor market indicators and recognizing the disparities within the current economic landscape, particularly the K-shaped recovery where different segments of the population are experiencing vastly different economic realities. The key takeaway is that the potential for rate cuts is increasingly tied to the performance of the labor market, rather than solely to political considerations.