Evercore ISI’s Krishna Guha on why the Fed is in 'wait and see' mode

Key Concepts:

• Federal Reserve (The Fed)
• Interest Rate Cuts
• Data Dependence
• Labor Market
• Employment Report
• Private Sector Hiring
• Tariff Policy
• Economic Data Quality
• CPI (Consumer Price Index)
• Household Survey
• Reporting Bias

I. September Fed Meeting and Interest Rate Cut

• The Fed is expected to maintain a "wait and see" approach through the summer, with a potential decision on interest rate cuts in September.
• Two Trump appointees, Waller and Bowman, are anticipated to dissent in favor of an immediate rate cut.
• Krishna believes Fed Chair Powell will emphasize data dependence but suggest the bar for a September cut is not high, implying a "soft default" for a cut at that meeting.

II. Upcoming Jobs Number and Labor Market Uncertainty

• There's a wide range of estimates for the upcoming jobs number, from 0 to 170,000, reflecting uncertainty about the labor market.
• The Fed is waiting for data from June, July, and August to make a decision on rates.
• The labor market has been solid overall, but with some softening, particularly in private sector hiring outside of health and education.
• Weak private sector hiring in Friday's print would push the Fed towards a September cut.

III. Tariff Policy and Economic Clarity

• The Fed desires clarity on tariff policy to assess its impact on the economy.
• Some clarity has been achieved with agreements with the EU and Japan.
• The Fed is unlikely to wait for perfect clarity on everything before making a decision, viewing it as a risk management assessment.

IV. Concerns About Economic Data Quality

• A Reuters poll indicated that nine out of ten economists are concerned about the quality of official government economic data.
• The percentage of CPI inputs based on guesses has increased significantly in recent months.
• While US data is still considered relatively good, there is some deterioration in data collections.
• There are concerns about how undocumented migrants are responding to household surveys, potentially introducing reporting bias.
• Deteriorating data quality could hinder decision-making for the Fed, corporations, and households.

V. Data Collection and Reporting Bias

• There are concerns about how people are responding to the household survey and the labor market report, with some undocumented migrants potentially responding differently due to fear of consequences.
• Both collection issues and reporting bias are causing some of the data to become "fuzzed up."
• The situation is not as dire as in the UK, where labor data has been unreliable, but there is a need to prevent further deterioration of data quality.

VI. Conclusion

The Fed is likely to maintain a wait-and-see approach until September, with a potential interest rate cut dependent on incoming economic data, particularly regarding the labor market. While some progress has been made on tariff clarity, concerns are growing about the quality of economic data, which could complicate decision-making for policymakers and businesses alike.