US Economy: Data Verification Before Rate Cuts

■ While a September rate cut seems very likely, the strength of current indicators makes future policy decisions more complicated.  

■ Increasing pressure from the US government on the Federal Reserve, along with concerns about its independence, raises long-term risks of higher inflation. 
 
    Federal Reserve (FRB) Chair Powell, in his keynote speech at the Jackson Hole symposium on August 22nd, indicated a shift in the risk balance from "rising inflation" to "falling employment,' which greatly raises the chances of an FRB rate cut in September. July's employment data showed a slowdown in the labor market. Despite resilient economic activity indicators, this suggests a cautious approach to rate cuts. The Conference Board's August consumer confidence survey, released this week, showed that the employment gap—the difference between those saying "jobs are plentiful" and "hard to find"—has shrunk for eight months straight to 9.7 percentage points, down from 22.2 at the end of last year, indicating a weakening labor market. Meanwhile, continuing unemployment insurance claims slightly decreased in the week ending August 16th (down 7,000 to 1.954 million). The trend since June suggests that the labor market cooling may be more moderate than employment data alone implies. 

    In this context, some FRB officials have taken a wait-and-see approach after the July employment data, emphasizing a "data-dependent" stance, showing there is no clear consensus within the Fed on shifting risk. Most economic indicators this week remain strong. Despite higher tariffs, corporate profits rose 1.7% month-over-month in the second quarter. Core capital goods orders (excluding aircraft and non-defense capital goods) increased 1.1% in July, showing resilience in investment. Based on Chairman Powell's remarks, a September rate cut by the FRB is still highly likely unless August employment data, due to be released on September 5th, indicates a much stronger economy. However, if labor and economic activity indicators continue to improve, future policy decisions and statements could become more complicated. 

    Meanwhile, pressure from the US government on the FRB is growing. President Trump issued a notice of dismissal to Board member Tim Cook, citing irregularities in mortgage lending. Cook, arguing his dismissal was improper, has filed a lawsuit in federal court in Washington, D.C., and is waiting for the court's decision. Many studies show that central bank independence is negatively linked to long-term inflation. Political interference in monetary policy could lead to higher inflation, and the FRB may face difficult decisions ahead.