Danielle DiMartino Booth: The Fed Is Still Behind The Curve

Episode Summary

Executive Summary: Jack Farley and Danielle DiMartino Booth discuss the Fed’s surprise 50 bp rate cut as evidence Powell is prioritizing weakening labor data over market expectations. DiMartino Booth argues the labor market is much softer than reported, recession is already underway, and more cuts may not prevent rising unemployment, credit stress, and equity vulnerability.

Main Topics: Fed’s surprise 50 bp cut and Powell’s shift (Priority: 5/5): The episode opens with the historic Fed decision to cut by 50 basis points. DiMartino Booth argues Powell broke from the Fed’s usual habit of avoiding surprises and defied market pricing, resembling Volcker more than prior chairs. Labor market weakness and data revisions (Priority: 5/5): A major theme is that official payroll and unemployment data are overstating labor strength. She emphasizes downward revisions via the QCEW, weaknesses in private payrolls, and gig/part-time work masking true stress. Recession timing and NBER call (Priority: 5/5): DiMartino Booth repeatedly says the U.S. is already in recession, revising her earlier start date from October 2023 to April 2024 based on rule-based indicators and labor deterioration, and predicts the NBER will eventually confirm it. Inflation disinflationary trend (Priority: 4/5): She argues truflation and other indicators show companies are losing pricing power and inflation is trending lower, possibly below target, supporting more Fed easing even as growth weakens. Credit stress, defaults, and zombie companies (Priority: 5/5): The conversation covers rising charge-offs, commercial real estate issues, private credit risk, and the inability of lower policy rates to revive overleveraged borrowers without returning to zero rates. Stocks, valuations, and market complacency (Priority: 4/5): She believes equities are in a bubble, that valuations are stretched, and that markets are pricing an immaculate soft landing despite weakening fundamentals and recessionary conditions. QT, balance sheet runoff, and mortgage market (Priority: 3/5): They discuss continued balance-sheet reduction, especially MBS runoff, and how refinancing dynamics, reserve levels, and mortgage credit conditions interact with the broader tightening in financial conditions.

Key Arguments: Powell’s 50 bp cut was a historic break from the Fed’s typical practice of conforming to market expectations. Official labor data are materially overstating job creation due to the BLS birth-death model and later QCEW revisions. The private sector labor market is weaker than the headline employment data suggest, with much job growth concentrated in government and healthcare. The unemployment rate likely has limited cushion; once it rises meaningfully from lows, history often shows recession. Gig work and part-time employment are masking labor stress, keeping initial claims subdued while continuing claims and underemployment rise. Truflation and other price indicators suggest disinflation is continuing and firms are losing pricing power. More rate cuts may help at the margin, but they will not quickly repair credit stress or fully offset the lagged effects of the hiking cycle. Commercial real estate, private credit, autos, and high-yield refinancing are among the most vulnerable areas. Equity markets are overly optimistic and have priced in a soft landing that is inconsistent with the underlying data. The Fed may continue QT because reserve scarcity is not the binding constraint; economic disruption would be the main reason to stop. The NBER will likely backdate the recession once revisions to labor and income data become undeniable.

Data Points: Fed rate cut: 50 basis points - The Federal Reserve’s historic September decision Fed rate-cut market pricing before meeting: ~59% probability for a 50 bp cut - DiMartino Booth says markets were not fully priced for the move Economists surveyed: 95 of 114 expected 25 bp - Shows consensus expectation versus actual Fed decision QCEW private payroll revision: 2.4 million to 1.4 million - Downward revision to private payroll gains in the year through March 2024 Truflation reading: 1.01% - Used as evidence of cooling pricing power and disinflation Correlation: truflation vs CPI changes: 0.97 - Cited to support truflation as a timely inflation signal Current unemployment rate: 4.2% to 4.3% - Level discussed as the starting point for further deterioration Fed unemployment forecast peak: 4.4% to 4.5% - Median and worst-case FOMC projections for end-2024/end-2025 Rate-cut path projected by Fed: 3.4% by end-2025; 2.9% longer run - Fed’s updated SEP and terminal rate expectations Layoff announcements: Average of 100,000+ per month over last five months - MacroEdge tracking cited as recession-consistent September layoff pace: Potentially half of prior five-month average - Early indication of slower announced layoffs, though still weak Part-time employment: Highest since the Great Financial Crisis - Presented as evidence of labor underutilization Older workers re-entering labor force: 379,000 age 55+ in one month - Cited as stress-related labor market behavior in August Recession-related rule: McKelvey rule triggered in Oct. 2023; retriggered in Apr. 2024 - Used to argue recession timing and labor deterioration Historical NBER lag: Average 256 days - Time typically taken to declare a recession Fed MBS runoff cap: Up to $35 billion per month - Ongoing quantitative tightening for mortgage-backed securities Fed Treasury runoff cap: Up to $25 billion per month - Ongoing quantitative tightening for Treasuries Large stock rally into first cut: Stocks up 28% through Tuesday close - Compared to 1995’s 24% rise into the first cut Government/healthcare job growth share: 50% of jobs created in the last year - Used to argue private-sector labor strength is overstated Student loan repayment issue: 47% of Americans not paying - Mentioned as a looming credit headwind when repayment hits credit reports

Pivotal Quotes: "He broke the mold today. He took us back to the days of Paul Volcker." — Daniel DiMartino Booth: On Powell’s willingness to defy market expectations with a 50 bp cut "I’d sooner see Jesus Christ himself walk through the front door of this restaurant right now." — Daniel DiMartino Booth: On the Fed’s optimistic unemployment forecast and soft-landing assumptions "Powell has just made uncertainty great again." — Daniel DiMartino Booth: On the Fed’s lack of clear forward guidance and market volatility

Implications: The conversation implies a weak labor backdrop, persistent disinflation, and rising credit stress. If DiMartino Booth is right, Fed cuts may not prevent a recessionary downturn, leaving equities and leveraged borrowers vulnerable.