Yardeni Research | The Hawks Versus Owls At The Fed

💡Federal Reserve hawks advocate for a September rate hike due to persistent inflation, which they believe is not on a steady path towards the Fed's 2.0% target. Led by Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari, the hawks cite insatiable demand for capital from the AI buildout, wide fiscal deficits, and headwinds to national savings from accelerating retirements and slower immigration, suggesting the hypothetical "neutral" federal funds rate is rising. Hammack emphasizes that excessive economic growth could fuel more inflation, necessitating tightening to restore price stability and ensure the policy rate is restrictive enough. They dissented from the July FOMC decision, favoring a 25bps hike, and remain inclined to support an increase at the next meeting on September 15 and 16.

💡Federal Reserve owls favor holding interest rates steady in September, primarily due to July's subdued inflation readings, which support their case that inflation is on a downward course. Many owls operate within the framework outlined by New York Fed President John Williams, who indicated that core PCE inflation above 0.2% m/m in the second half of the year could warrant a hike. With July core PCE inflation tracking around 0.2% m/m, this data likely reinforces their preference for a hold. The owls, who voted to keep rates unchanged in July, share inflation concerns but prefer to await more data, including August's CPI, PPI, and employment reports, to confirm whether additional tightening is necessary before concluding inflation is persistent.

💡Recent labor market trends present a mixed picture, influencing the Federal Reserve's monetary policy decisions by offering support to both hawkish and owlish camps. While jobs growth has slowed, with nonfarm payrolls falling by 23,000 in July and private employers adding just 8,250 jobs per week over the four weeks ended July 25, labor demand remains resilient, as evidenced by 7.36 million job openings in June. This resilience, coupled with robust consumer spending, suggests the economy can withstand a rate hike, supporting the hawks. Conversely, slowing jobs growth and unit labor costs indicate labor is not the primary source of inflation, strengthening the owls' argument for holding rates steady and waiting for more data, as the labor market is neither hot enough to mandate hikes nor weak enough to justify cuts.

💡Three factors contribute to slowing jobs growth despite healthy labor demand: skills mismatches, Baby Boomer retirements, and less immigration. Firstly, skills mismatches, with 36% of firms having unfilled openings and 51% reporting few or no qualified applicants in July, reflect businesses struggling to find workers with the right expertise and in the correct geographic locations, particularly due to the AI buildout creating specialized demand. Secondly, Baby Boomer retirements have constrained labor supply, causing the labor force to shrink by 264,000 in July and the labor force participation rate to fall to 61.4%, with older workers accounting for much of this reduction. Thirdly, slower immigration, with growth in the foreign-born labor force decreasing from over 4.0% y/y in 2023-2024 to less than 2.0% currently, disproportionately impacts the aggregate labor force participation rate, as foreign-born workers participate at a higher rate (66% versus 61% for native-born workers), signaling supply constraints rather than weak demand.

💡Skills mismatches significantly impact current jobs growth and labor market dynamics by making it difficult for businesses to find qualified workers, despite healthy demand. The National Federation of Independent Business's (NFIB) July survey revealed 36% of firms had unfilled openings and 51% reported few or no qualified applicants, the highest shares since June and September 2025, respectively. This issue is partly driven by the changing composition of labor demand, particularly the AI buildout, which acts as a private-sector stimulus, creating specialized needs for roles such as electricians, HVAC technicians, engineers, and power-grid specialists. Additionally, the mismatch is geographical, as many projects are concentrated in specific regions, and high mortgage rates reduce worker mobility, locking homeowners into lower-rate mortgages. Consequently, firms struggle to fill positions with the right skills in the right places, contributing to slower jobs growth even amid strong overall labor demand.

💡Reduced immigration significantly affects the overall labor force and economic growth by constraining labor supply and exacerbating skill shortages. Growth in the foreign-born labor force has slowed from over 4.0% year-over-year during 2023 and 2024 to less than 2.0% currently. Foreign-born workers participate in the labor force at a higher rate, approximately 66%, compared to native-born workers at 61%. Consequently, slower immigration growth has a disproportionate impact on the aggregate labor force participation rate. If stricter immigration policy continues to limit the foreign-born workforce, slower payroll growth will increasingly reflect supply constraints rather than a weakening of labor demand, potentially hindering economic expansion by limiting the availability of workers for growing industries.

💡Significant wage growth, reflecting robust labor demand, is evident in specific industries benefiting from the AI buildout, where labor shortages are most pronounced. In July, average hourly earnings rose by 4.4% year-over-year in construction, 5.8% in information services, and 8.1% in utilities. These increases indicate strong demand for skilled workers in sectors directly or indirectly supporting the AI expansion. The elevated wage growth in these areas suggests that employers are competing for a limited pool of qualified talent, pushing up compensation and highlighting the health of labor demand within these crucial segments of the economy despite a general slowdown in overall jobs growth.

💡Rising memory-chip costs and tariffs are significantly affecting durable goods and consumer electronics prices by driving up production expenses and import costs. Specifically, prices for computers, peripherals, and smart home assistants surged 3.2% month-over-month in July, reflecting the impact of higher memory-chip costs tied to the ongoing AI buildout. This indicates that increased demand and supply chain dynamics in the technology sector are translating into higher consumer prices for electronics. Additionally, motor vehicle parts and equipment prices rose 1.0% month-over-month, which may reflect tariff-related cost pass-throughs. The overall durable goods prices increased 0.3% month-over-month, suggesting that tariffs, alongside the AI buildout, continue to keep goods inflation sticky at 3.9% year-over-year in July, despite some moderation in other areas.

💡Bank of America's July Consumer Checkpoint data reflects a resilient, though slightly moderated, current economic environment for consumers. Total card spending slowed from 6.3% year-over-year in June to 5.0% in July, primarily attributed to the fading of online promotions and World Cup spending. Despite this moderation, the 5.0% spending growth was still one of the three strongest readings of the past three years. Furthermore, spending excluding gasoline rose by 4.3%, indicating underlying strength in consumer demand beyond volatile energy prices. This data supports the view that consumers are largely healthy, capable of withstanding economic pressures, and continuing to spend, aligning with the narrative of a robust consumer sector.

💡The New York Fed's Household Debt and Credit Report reveals little evidence of significant consumer financial stress, indicating a stable and resilient consumer base. Transitions into early and serious delinquency were broadly stable in July, with only modest increases observed in auto-loan and mortgage transitions. Bankruptcies remain at historically low levels, further underscoring the absence of widespread financial distress. Additionally, third-party collections ticked lower to 4.9%. These indicators collectively suggest that despite economic uncertainties, the majority of consumers are managing their debt obligations effectively, and their financial health is not currently a major source of concern regarding broader economic stability or potential downturns.