Expectations about the Federal Reserve’s next policy meeting oscillated sharply this past week, with a quarter-point cut in the federal-funds target rate once again being the odds-on bet. But attention also should also be paid to Japanese monetary and fiscal actions.
In the U.S., the September employment data, long delayed by the federal government’s record 43-day shutdown but released on Thursday, revealed a 119,000 jump in nonfarm payrolls that month, far above economists’ guesses. That was tempered by a downward revision to the prior two months’ tally totaling 33,000, which put August’s total into negative territory.
The headline unemployment rate ticked up 0.1 percentage point, to 4.4% in September, but that reflected more people entering the labor force, a good thing. Conversely, the so-called underemployment rate (U6 to stats nerds), which reflects part-timers who want a full-time gig and folks who would look for a job if they thought they could find one, dropped a tenth, to 8%.
For the Fed, the lack of government numbers supposedly engulfed policymakers in a statistical fog. But an array of other indicators show the economy continuing to chug along, albeit with the labor market in its low-hire, low-fire mode. The Atlanta Fed’s GDPNow shows the economy tracking at a robust 4.2% rate of expansion in the current quarter.
Nevertheless, the probability of a quarter-point reduction in the current fed-funds target range of 3.75% to 4% at the Dec. 9-10 Federal Open Market Committee meeting jumped up to more than 70% Friday, according to the CME FedWatch site, nearly double that of a week earlier.
That followed comments from New York Fed President John Williams, who said he saw “room for further adjustment in the near term” for the funds rate to move closer to neutral. His views tipped the balance for two reasons.
As New York Fed head, he is vice chair of the FOMC, has a permanent vote on the committee, and tends to have the most sway after the chair of the Fed Board of Governors, Jerome Powell, who also chairs the FOMC. Moreover, Williams’ vote makes four certain votes for a cut, along with Fed governors Christopher Waller and Stephen Miran, and Michelle Bowman, vice chair for supervision. Just three more votes would be needed for a bare seven-vote majority on the 12-member FOMC.
Kansas City Fed President Jeffrey Schmid dissented from the October cut in favor of no change, while Boston Fed President Susan Collins said last week that continued slight restraint was appropriate. Chicago Fed President Austan Goolsbee added that he was uneasy about “front-loading” rate cuts.
The FOMC won’t have fresh employment reports before its next confab. Release of the November data, with some October numbers folded in, is delayed until Dec. 16. The panel will have the October Job Openings and Labor Turnover Survey, or Jolts, on the first day of its deliberations, Dec. 9, and the ADP report on private employment on Dec. 3. Plus, there are weekly jobless claims numbers (which remain historically low).
But the Fed isn’t the only factor affecting liquidity conditions. In particular, what happens in Japan doesn’t stay in Japan. As Société Générale strategist Albert Edwards writes: “The world’s financial markets had long gorged themselves on Japan’s multidecade era of ultralow interest rates and super-sized [quantitative easing]. Western politicians in particular should quiver with fear as Japan turns off the liquidity tap that has in effect suppressed Western bond yields below levels that their bloated fiscal deficits justify.”
That may be happening. The clearest sign of such a twist of the liquidity tap in Tokyo would be action to halt the slide in the yen’s exchange rate, which hit 158 to the dollar Thursday. That matched its early-2025 low and was close to the perceived line in the sand for Japanese authorities at 160.
To review, intervention would involve selling dollars, which means the Bank of Japan unloading some of its holdings of U.S. Treasury securities. This, in effect, would tighten dollar liquidity and reverse the process of injecting funds into the global system that Edwards describes.
The weakness of the yen has been accompanied by a sharp rise in long-term Japanese government bond yields. Both have reflected the ultra-expansionary policies under Japan’s new prime minister, Sanae Takaichi, who favors easy Bank of Japan monetary policy to support a big budget deficit. JGB yields have jumped as a result. For domestic investors, such as big life insurance companies, U.S. Treasuries now yield less than JGBs after deducting the cost of hedging exchange-rate fluctuations. So, they no longer have an incentive to send funds abroad.
The profligate policies have also provoked a slide in the yen, to which U.S. Treasury Secretary Scott Bessent objected in September. And it hurts Japanese consumers having to pay higher prices for imports. So, Japanese Finance Minister Satsuki Katayama Friday took the unusual step of warning of possible intervention, which stabilized the yen for now.
To repeat, possible Japanese intervention would reverse the flow of liquidity into global markets that Edwards pinpoints. It should be watched as closely as the prospects for the next Fed move.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
