The most interesting part of Jerome Powell’s speech on Friday was that he didn’t say anything about cutting rates ‘gradually’, or ‘methodically’ which would’ve indicated that he wanted to rein in Fed cutting expectations. Some of his colleagues (including Mary Daly) had used this ‘gradual’ language in interviews last week. It told me that he is ok with where the 2-year is priced which helps to add stimulus to the economy before the Fed cuts rates.

But then today, Mary Daly, president of the San Francisco Fed, did an interview with Bloomberg’s Michael McKee where she gave some concrete reasoning why at least some of the Fed is not as concerned about a recession as the bond market is. Transcribed from the interview (my italics),

Michael McKee: The chairman, and basically the Open Market Committee said coming out of the meeting, that the downside risks are greater to employment than inflation. How big are the downside risks to employment right now?

Mary Daly: That’s a very important question and so we definitely have to keep that in mind, because as you know, when the labor market starts to adjust, it has often adjusted abruptly and significantly. But right now, we don’t see any signs of that. You look at initial claims for unemployment insurance, you look at early indications of layoffs, they are just not present and so that’s not giving us any signs that there is a deterioration. Importantly, as you know, the Reserve Bank Presidents spend a considerable amount of time talking to contacts; businesses, workers. We’re really not hearing signs that firms are poised for layoffs, what they are doing is managing headcounts, making sure that they really want to re-fill a job before they do it. But, at this point, I don’t really see any warning signs of weakness, but we want to make sure that we are adjusting policy as we go so that its ready for the economy we have and for the economy we are likely to get and ensure we don’t end up in that situation where we see real weakness.

I think it is just a matter of time before she gets these “warning signs of weakness”, but her saying that there isn’t growing weakness in anecdotal information is new. I was surprised to hear this, given Powell’s dovishness on Friday. I would’ve guessed that negativity behind the scenes (past the last 7/17 Beige Book) was a factor in how dovish Powell has sounded lately.

The non-confirmation in Initial Jobless Claims has been known, but it hasn’t been focused on. Before recessions, rises in Initial Jobless Claims have typically led (1990 and 2001) or at least were coincident-with (2007) the Unemployment Rate rising. It is subtle, but in this cycle, the Unemployment Rate has accelerated-upwards more than Initial Jobless Claims have (see chart below.) Eventually, initial jobless claims need to catch up.

Her mention of these things sets up new hurdles for the market to think about before pricing in more Fed cutting. Given how strong the bond market is trading, they may not matter and rates will keep falling, but they are important to track in coming days to see if the market responds (higher yields) to these new indications of a gap between what the Fed is seeing and what the market is.