Did the September rate cut stabilize? The labor cost index, which the Federal Reserve values most, unexpectedly slowed down
The Employment Cost Index (ECI) of the Federal Reserve, which measures wages and benefits, only increased by 0.9% in the second quarter, lower than the market's expected 1% and lower than the previous value of 1.2%. Previously, this index saw the largest increase in a year in the first quarter of 2024
The US labor cost growth index unexpectedly slowed in the second quarter, further enhancing signals of easing inflation, paving the way for a rate cut in September.
On July 31, according to the latest data released by the US Bureau of Labor Statistics, the Employment Cost Index (ECI) measuring wages and benefits only increased by 0.9% in the second quarter, below the market's expectation of 1% and lower than the previous value of 1.2%. Previously, the index saw its largest increase in the first quarter of 2024.
Following the announcement, the 2-year Treasury yield briefly fell below 4.32%, and the 5-year Treasury yield also briefly fell below 4%, both reaching their lowest levels since February.
This cooling-off not only exceeded market expectations but also echoed Federal Reserve Chairman Powell's previous testimony. Powell stated in Congress:
"The labor market is no longer a force for inflation."
ECI is one of the important indicators used by the Federal Reserve to assess labor market conditions and predict core inflation, adjusting for changes in structure and job quality.
Some analysts suggest that the slowdown in private sector wage growth has contributed to the modest increase in labor costs this time, further proving the return of inflation to a downward trend. Data shows that wages and salaries for private sector workers (excluding incentive-paid occupations) increased by 1.0% in the second quarter, with the year-on-year growth rate dropping from 4.2% in the previous quarter to 4.1%, compared to 4.8% in the same period last year.
Recent indicators also show a cooling-off in wage growth, a slowdown in hiring pace, and an increase in the unemployment rate. Data on Tuesday indicated that job vacancies continued to decline in June, with recruitment levels falling to the lowest point since 2020.
Furthermore, some analysts predict that due to the slight increase in ECI in the previous quarter, the Federal Reserve may maintain interest rates at the upcoming two-day policy meeting