@theMarket: All Eyes Await The Fed

When the Federal Open Market Committee meets Dec. 9-10, it will decide to lower interest rates again — or not. The data is inconclusive at best, but stocks have rallied for more than a week in anticipation of a cut. Let's hope they are right.

 

The odds of a cut are over 90 percent in the betting markets. The last time they reached that level (at the Fed's previous meeting), they reduced rates by 0.25 percent. Traders expect the same size cut this week.

 

For the Fed, the decision comes down to determining the potential for additional job weakness in the months ahead. Here, the data becomes murky. The Bureau of Labor Statistics never collected the October employment numbers, citing the government shutdown. Some say that it was a convenient turn of events for the administration since more than 100,000 government workers left their jobs at the end of September.

 

In addition, the president's rapid changes in immigration policies may also be behind some of the weakening employment numbers. During the Biden years, an influx of immigrants was primarily responsible for much of the job growth. Higher immigration boosted payroll job growth by 70,000 jobs per month in 2022, 100,000 jobs per month in 2023, and even more than that in 2024, according to the Federal Reserve Bank of Dallas.

 

Before the pandemic from 2010 to 2019, the share of job growth attributable to immigration averaged 45 percent. The Congressional Budget Office's immigration projections expect a reversal of those numbers under the present administration. Net immigration will drop from 3.3 million in 2024 to 2.6 million in 2025 and 1.6 million or less in 2026. And that was before Trump's additional crackdown on third-world immigration announced last week. Many immigrants, legal or otherwise, have failed to show up at their jobs in fear of indiscriminate ICE raids.

 

As you can imagine, getting accurate data on this specific rate of immigrant job loss is difficult, if not impossible, for the Fed to obtain. The most recent ADP private payroll data for November showed a loss of 32,000 jobs versus an expected 10,000 job increase. The job losses were concentrated in construction and manufacturing sectors, where immigrants are known to work in large numbers.

 

Immigrants' participation in the workforce has increased the U.S.'s growth rate, so one can expect a slower rate of growth than would have otherwise occurred going forward. Immigration was a hot-button issue in the U.S. during the presidential elections. Polls found that most voters had approved of the president's immigration intentions. 

 

As such, many question whether the Fed should even care about the impact of immigrant job loss. The administration's policy is to reduce immigration despite the consequences.

 

Presumably, Congress, the administration, and voters care more about jobs for Americans than about the consequences of immigration policies for employment or growth.

 

In any case, the White House's clear intention is to install new people at the central bank who will facilitate the government's fiscal policies. Trump has already succeeded to some extent. He will also name a replacement for Chair Jerome Powell next month. Most investors expect an easy-money policy to unfold in the coming months, regardless of what the Fed does next week.

 

The issue today is that the market has already discounted an interest rate cut after a more than 5 percent gain in the last week and a half. Look out below if the Fed disappoints. I doubt that will happen. Once that meeting is out of the way, we are heading for new highs.