Blerina Uruci, Chief US Economist at T. Rowe Price, shared her views on the recent US economic data ahead of this week’s Federal Open Market Committee (FOMC) meeting.
The US economy faces many cross currents affecting both inflation and demand. On net, this reinforces the Fed’s decision to keep monetary policy unchanged over the next few meetings as it assesses the impact of higher energy prices on the economy as well as the easing in financial conditions since last year. In addition, despite the trend decline in employment growth in recent quarters, the unemployment rate has remained remarkably stable, which suggests that some of the slowdown we are seeing are structural rather than a cyclical signal that the labor market is falling off a cliff. This validates the Fed’s decision to keep policy unchanged as it assesses the cross currents facing the economy.
We saw a large decline in last week’s employment numbers. The January report exaggerated strength, so we saw some pushback as February’s report exaggerated weakness. The unemployment rate has been stable since Q3 last year. In addition, there are many cross currents affecting the US economy including risks to inflation from higher energy prices and a positive growth outlook supported by consumption and capex growth. Nevertheless, I think that slow payroll growth paves the way for a more dovish Fed in the second half of 2026, assuming oil prices normalize in a few weeks and directionally rates should move lower.
What does this mean for monetary policy? March is not on the table for the Fed to cut because personal consumption expenditures (PCE) inflation for January (near term) will be on the stronger side and the FOMC will have to balance risks on both sides of the dual mandate. Looking ahead, we see the FOMC having a more dovish reaction function in the second half. And I expect it will cut rates by 2-3 times in the second half, relative to market pricing of 1-2 cuts. When thinking about policy in the next 12 months, I think that 3-4 cuts are possible and above a more dovish view than the market.
