From December to September: Doyle's Fed Pivot on Jobs Strength

**SPEAKER_1** (0:00)
Let's talk more about today's jobs report with our next guest. Joining me now, David Doyle, Head of Economics at Macquarie Group. David, great to have you on. Now, I was reading through your note that you put out after we got the numbers this morning. You are now more convicted that we're gonna get a hike in September as opposed to your call before the report, which was calling for it to come in December. What in this report was decisive enough for you to move up your timeline and change your baseline?

**David Doyle** (0:26)
Yeah, so I mean, I would say it was just broadly very positive, right? So the headline payrolls number was upbeat. You had a strong results for things like construction and manufacturing, which is indicative of the cyclical economy, picking up steam. And then the household survey was also robust, a strong household employment figure that was over 500,000. The unemployment rate stable, but part of that is related to participation effects. Lots of the detail in the household survey as well, suggested strengthening labor markets. You take all of that and then you combine it with, I would say the more hawkish tone on inflation that we got from Chair Warsh at Jackson Hole. And we think that that now points towards September as being the most likely date for when you see the first hike from the Fed. However, I'd caveat that with saying that there's a major release a week from now, which is the CBI for August.
That I think will also play an important role and so could push, if that's soft, it could push the committee the other way to defer a hike. So we're still in wait and C mode. But at this point, you know, our job is to have a call. And to your right, that baseline call has moved to September with, you know, with the data coming in, potentially changing that in the next week or so.

**SPEAKER_1** (1:41)
So when we get CPI next week, how strong does it need to be to essentially lock in a September hike?

**David Doyle** (1:48)
Well, I think it's gonna, I think you just can't point to one number. It's gonna, I think it's gonna hinge a lot on the details of that.
You know, whether it shows sort of like an improvement, what's going on with core goods, what's going on with core services. So we'll have to look at the report on the whole. I think the year over year number, if that ticks up, you know, what the translation, what the transmission mechanism looks like to core PCE will be factored in. So I suspect that a lot of economists, myself included, will be going through that release with a fine tooth comb to try and gauge where we think the Fed will, you know, what the Fed is most likely to do later in the month.

**SPEAKER_1** (2:23)
And you're also looking for another hike in the first quarter of 27, David. If the numbers come in as expected here, I mean, I guess what would have to happen between now and then for the Fed to deliver two hikes before that instead of just one?

**David Doyle** (2:40)
So I think if you think the Fed is going to hike at a faster pace, a lot of it will come down to the inflation readings, right? So I think that there's this debate right now within the economics community, within sort of Fed watch community about what the direction is that inflation is heading. Some folks like Chair Warsh prior to Jackson Hole are focused on these things like the Trim Mean PCE, which had shown sort of further improvement.
Other folks are focused on the Strict Core PCE, which is accelerating and going the other way. I would say that my view is somewhat in between those two. I think that is where the truth lies. So I think there has been some progress, but inflation has remained sticky. I think underlining inflation at around 2.5, 2.6, 2.7% on a year over year basis. So if we don't see the core PCE start to move more in the direction of where we see underlying inflation or where the true mean is seeing underlying inflation, that might lead them to sort of nudge up the policy rate again before that first quarter of 27 But again, I just emphasize that it really hinges on the incoming data. I would say directionally though, we think you probably have 50 basis points in total of rate hikes coming over the next, call it six months or so.

**SPEAKER_1** (3:55)
And David, how much credence are you giving to this reading of the tea leaves or diving in for any clue in the tone of Kevin Warsh when he speaks, when he's already been quite clear that he's not going to do any forecasting, he's not going to give hints, and we're seeing so much reaction to every word. And Fed speak from other Fed presidents and Fed governors as well, and members of the FOMC. How much are you relying on your interpretation of the commentary coming out of the Fed versus the actual data themselves?