Now Fedspeak is more important than ever

Rise in initial jobless insurance claims usually indicates a coming recession

If you were inclined to believe that the global slowdown in growth was beginning to hit the US, last week’s data shored up your argument. And the new information makes what Chairman Jerome Powell says at the Federal Reserve’s upcoming meeting almost as important as what the Fed does.

First, the numbers. It’s not just that job growth, at 155,000, was some 43,000 below the consensus forecast. More disturbing is that the so-called underemployment rate ticked up from 7.4 to 7.6 per cent.

And there are the initial claims for unemployment insurance, which came in earlier last week. The four-week moving average has started to make what looks like the beginning of a distinct leg upwards. This is significant: Along with the (partially) inverted Treasury yield curve, a rise in initial claims for unemployment insurance is a reliable indicator of a coming recession.

All of this makes what the Federal Reserve does at its next meeting even more important. Markets are increasingly pricing in the probability that the Fed could hold off on a December rate increase.

Given Powell’s temperament, however, it’s highly unlikely that the Fed would make such a major course correction without giving the markets a heads up. In the absence of a horrifically bad signal — like sudden collapse in interest rates on 10-year Treasury bonds or a full inversion of the yield curve — not raising rates would probably just cause confusion.

The secret to calming markets and leaning against slowing economic activity will not be the rate decision, but the tone Powell sets in the press conference later. What markets need to see is Fed governors and presidents expressing a shared and increased concern about the new data.

On Thursday, the president of the Dallas Fed, Robert Kaplan, did exactly that, stressing the importance of patience in an uncertain economy. If Powell picks up on this theme, then there could be a significant easing of financial conditions going into next year.