Earlier this week, the Federal Reserve announced that they were not going to make any changes to the Fed Funds rate. At the beginning of the year, investors were anticipating two rate cuts in 2026. After Wednesday's Fed meeting and announcement, it now appears that investors expect no rate cuts at all this year. Here are three reasons why I think the Fed is mistaken.
Reason #1
Going into the year, this was my #1 concern. It is still my number one concern: the jobs market. As you can see in our first chart, the number of job openings has plummeted. After Covid, job openings skyrocketed - well beyond a 'normal' trend. As a result, it was to be expected to see some return to normalcy. However, the jobs openings data has not stabilized.
Furthermore, while layoffs and the unemployment rate are still relatively low, if you do become unemployed, the average duration of unemployment is almost 26 weeks - that's 6 months. That is relatively high when viewed from history's perspective and not a sign of a healthy, robust jobs market.
Furthermore, take a look at the chart in the blog's header. The blue line is the 12-month rate of change for total non-farm payrolls (jobs). The red line is the 10-year moving average. Note the red circles. This is where the 12-month rate of change drops below the 10-year average and, in almost every instance that happens as we approach a recession.
So, jobs is the #1 reason why the Federal Reserve should have lowered rates this week.
Reason #2
As a measure of inflation, the Federal Reserve prefers PCE as opposed to the more common CPI. Our second chart today is "Core" PCE, which removes food and energy from the PCE equation. Given the war in Iran, the spike in oil is obviously a concern as the cost of oil affects transportation costs, which can also impact the cost of food. So, yes, we should be a little concerned about the massive spike in the price of oil.
So, perhaps the Federal Reserve does not want to cut rates because of the war in Iran. But prior to the war's first strikes, the futures markets were forecasting a very low probability of the Federal Reserve lowering rates this month. So, one could argue that the war in Iran has not factored into this month's decision.
But look at the data.
First of all, the green horizontal line represents 2.0%. This is the (completely) arbitrary PCE target that the Fed wants to hit. But why? Take a look at the left side of the chart. The first half of the 1990s saw PCE well above that 2.0% target.
The second thing I would point to is the red line. That is the 10-year moving average. Yes, PCE is back above that average, but it has flatlined for the last two years. Yes, you will hear politicians talking about inflation being a problem. But I disagree. The way I'm looking at the data, inflation is not the problem. High prices are the problem. To get prices back down, we need to see deflation and I seriously doubt we want to see wholesale deflation!
Reason #3
While it is very nice to finally see that the Magnificent 7 stocks are no longer leading, there's a difference between "lagging" and "dragging".
If we are in a robust bull market, we should see broad participation from a wide swath of the market. For far too long, it has been all about the Magnificent 7. Towards the end of 2025, I stated that it appeared we were starting to see "breadth" widen out. At the beginning of the year, we finally saw some confirmation - the average stock was starting to participate. That is a sign of a healthy stock market. A healthy stock market is also a sign of a healthy economy.
Well, the Magnificent 7 stocks are down ~14%. That is dangerously close to the lazy but traditional definition of a "bear" market of -20%. Given how much these stocks are down, they are weighing down - or dragging down - the broader market. No, I do not think the Federal Reserve should cut rates because the market is down. But, if the market is showing as much signs of weakness that it is, that is telling us something. If the market does not find support soon, one could argue that it is forecasting a bigger economic problem.
Put all of that together - and there are more data points, I'm just trying to be brief - and I think the Federal Reserve should have lowered rates this week.
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