It’s starting to look more like June 12 might be the day the Federal Reserve starts easing off the brakes and begins cutting rates. If so, that could shake the market’s recent calm in new and unexpected ways. 

Why June? Fed Chair Jerome Powell opened the door to the idea just a little bit wider when he was on Capitol Hill, telling House members on Wednesday that rates “have probably reached their peak” for this cycle and that “it will probably be appropriate to begin dialing back policy restraint at some point this year.”¹  

Of course, that doesn’t really mean June is when it will happen – nothing about those comments was exactly new, nor would anything Powell said really favor the FOMC meeting on June 12 over, say, September 18 (or even December 18, for that matter). But on Thursday, Powell went a few yards farther down the path when he told members of the Senate that the Fed is “not far” from the confidence needed to finally begin cutting rates. 

Only a fool would predict with certainty when the Fed will finally start to push rates lower. In fact, markets and the smart people that comprise them have tumbled numerous times since the post-pandemic rate hike campaign began by assuming that cuts were coming soon, only to discover they didn’t. But this time, something feels a little bit different – at least to my tired ear. 

Maybe it’s because the labor market is finally starting to show a few more cracks than it has for a long time: The most dramatic headline inside Friday’s employment situation summary was a 0.2% increase in overall unemployment to 3.9% – still low but half a percent higher than its cycle low last January and the highest it’s been for two years.² 

Moreover, the number of layoffs cataloged by outplacement firm Challenger, Gray & Christmas rose to more than 84,600 and showed a notable broadening out of job losses beyond just tech, where the bulk of recent layoff announcements have been focused.³ Even more ominous? Hiring plans are lower so far this year than they have been since 2009, when Challenger started keeping track.

Weaker labor markets mean mixed news: A softer job market has been a precondition for Fed cuts for a long time, and on the other hand, labor markets tend to pick up momentum when they finally do start rolling downhill, meaning that last month’s increase in the unemployment rate could simply turn out to be the first in a long series of unwelcome increases.

This may help explain why markets were not as impressed as they might otherwise have been when the potential for a June cut seemed to come into clearer focus last week. When the Fed quits raising rates – and quite often only after it begins cutting them – the economy starts to run into trouble and the job market starts to roll downhill. If that holds true, it could set up the next big disappointment by calling into question the “soft landing” thesis that many people seem now to have fully signed on to.

At a minimum, last week’s somewhat softer-than-hoped-for labor market data probably sets up this week’s consumer price index (CPI) data as a key pivot point for markets as we enter the spring and summer months. If inflation comes in tame, bets in favor of a June cut will become consensus and the odds of a cut in May will probably go up. But if CPI comes in too hot, optimism surrounding a June cut may quickly dissolve.

At least half the fun of anything worth doing is spent in anticipation of the event itself. And for what it’s worth, I’m convinced that the first one or even two cuts will be relatively easy for the Fed, at least as long as inflation stays reasonably tame and the job market (or wages) don’t accelerate meaningfully from here.

But the next three to eight? Not so much. And that could set up another disappointment for the summer months that markets might be uncomfortably unprepared for.

What to watch this week

Tuesday’s aforementioned CPI release is almost certainly this week’s main event on the macro stage. Again, a reading in line with expectations or tame enough to put to rest fears that inflation might be coming back for a second-round appearance would probably lend more credibility to Chairman Powell’s relatively less-hawkish comments last week and cause expectations to coalesce around a rate cut in June (maybe even May). But if inflation instead comes in a lot hotter than expected, look out: Rate-cut bets will re-size themselves in the opposite direction, likely dragging yields higher and equity markets lower in the process.

Producer prices – which have long played understudy to the center-stage CPI – are due out Thursday. Producer Price Index (PPI) inflation provides a better window into how businesses are dealing with price pressures and is therefore more relevant to things like corporate earnings and profit margins than the consumer-focused CPI. That could make PPI the more interesting release of the pair if and when the economy begins to slow in earnest, because in a softer economy, the market’s next cues will come from earnings and forward corporate guidance. But for now, CPI will capture most of the spotlight – deservedly so – unless something truly surprising happens with Thursday’s PPI release.

Beyond Tuesday’s CPI, the consumer will be in focus at least twice more this week, with retail sales on Thursday and the University of Michigan’s mid-month update of consumer sentiment on Friday. Both weakened last month, another endorsement of the view that the economy is softening and the consumer is getting tired. If one (or both) of this week’s consumer-focused releases supports that conclusion, markets will take note. For an interesting read into the minds of the U.S. consumer, pay attention when discount retailers Dollar Tree and Dollar General report earnings at mid-week. 

For the business sector, check out Tuesday’s small business sentiment index for the latest word on from the shops that form the backbone of the U.S. economy and create a significant portion of its wealth. Meanwhile, the New York Fed will release its Empire State manufacturing index on Friday, the first regional Fed manufacturing report to cross the ticker every month. Empire State and the other so-called “regional Feds” provide a detailed look into the health of the goods-producing sector for various Fed districts and are useful as a set of companion-releases to (and cross-check of) the purchasing managers’ indices (PMIs) that rank among the most respected forward-looking indicators for market economists. Empire State and its sibling releases have been somewhat weaker than the PMIs of late, and alignment between the regional Fed reports and the private-sector PMIs in one direction or the other could say a lot about where we might go from here. 

Finally, have a look inside Friday’s industrial production release for yet another perspective on the recession debate. One line item inside Friday’s report is capacity utilization – a figure that details what percentage of the nation’s productive capacity is used in sectors of the economy like manufacturing, mining, and energy production. While things like weather, labor disputes, and strikes can have significant influence on these figures in the short-term, they have also displayed an uncanny ability to “call the cycle” by tending to weaken before the economy tips over into contraction. Even in our modern, service-oriented economy, utilization rates among durable goods manufacturers have been particularly insightful, tending to peak anywhere from a few months to just over a year before recession arrives. While “false positives” are not unheard of, that figure has been slipping since around October 2022, meaning we could be reaching a make-or-break point if this signal eventually proves more than just noise.