Analysis: Market Interest Rate Viewpoint Seriously Deviates from Fed's Position, Mispricing or Brewing

BlockBeats News, August 8th, BCA Research analyst Dhaval Joshi wrote that the current market pricing of U.S. interest rates is significantly diverging from the Fed's stance, indicating a mispricing or potential brewing trouble. Trump has demanded a 3% rate cut from the Fed, considering that the July jobs report revealed a significant slowdown in the U.S. labor market. Trump seems to have the upper hand in this "battle" with Powell, but attention should be paid to the true reasons behind the labor market slowdown.

Joshi stated that the weakness in the labor market typically does stem from a reduction in labor demand; however, this is not the case now. The reason is that the new employment is not being primarily driven by the demand for workers but by the number of workers available for employment (labor supply). Furthermore, a rate cut will exacerbate the imbalance between labor demand and supply, potentially reigniting inflation without boosting job growth. Therefore, this would be a policy mistake.

It is essential to differentiate between pre-revised and post-revised data. Most economic data is initially released based on incomplete information, done as a trade-off for timeliness. Therefore, the more timely the data release is desired, the less accurate it will be. Once the data are thoroughly revised to include a complete information set, they become more accurate. Hence, the initial release of data is more "inaccurate" due to incomplete information rather than being "manipulated." Looking at the revised and more accurate U.S. total employment data, the picture is clear and consistent: the upward trend in employment is primarily attributed to the increase in labor supply. The recent softness in new employment is due to the slowdown in labor supply growth, rather than a decline in labor utilization (i.e., an increase in the unemployment rate). All of these factors contribute to a significant mispricing in the U.S. interest rate market.