1. Strong July Jobs Report – Stocks At New Record High

2. Fed Wants to Raise Rates, But Economy is Questionable

3. Fed Balance Sheet Reduction Usually Results in Recession

4. President Trump Will Dramatically Reshape the Fed

5. What Fed Policy Changes Should We Expect Just Ahead?

Overview

The Fed remains committed to raising short-term interest rates at least one more time this year, most likely at the September policy meeting as I will discuss below. The Fed also wants to start reducing its massive $4.5 trillion balance sheet this year, but doing so in the past has almost always led to a recession.

The Fed knows this and thus finds itself in a very uncomfortable position. Do they raise rates and begin to reduce the balance sheet this year? Or is doing both too much of a risk? That’s what we’ll discuss today.

In addition, we’ll also revisit the fact that President Trump will have the opportunity to dramatically reshape the Fed’s 12-member policy committee during his time in the White House. Trump will get to replace six of the 12 members in the next couple of years. That could be huge.

Before we get to that discussion, I will comment on last Friday’s strong unemployment report for July. I will also share a few thoughts on the fact that the stock markets have once again soared to new all-time record highs. Let’s jump right in.

Strong July Jobs Report – Stocks At New Record High

The Labor Department reported last Friday that the economy added a higher than expected 209,000 new jobs in July. The pre-report consensus of economists suggested 183,000 new jobs in July, so the latest report was considerably stronger than expected.

US Non-Farm Payrolls

The headline unemployment rate fell from 4.4% to 4.3%, the lowest level in 16 years. The number of employed Americans hit a new high of 153.5 million thanks to a surge of 345,000 in July. The employment-to-population ratio also moved up to 60.2%, tied for the highest level since February 2009.

The only disappointment in the latest jobs report was the fact that wages continued to rise at the paltry rate of 2.5% over the past year ended in July. Wages typically rise 3% to 4% a year when an economy recovers from recessions. But a slew of factors are holding wage growth down this time around.

Despite that, stocks soared to new all-time record highs again last week. The Dow Jones Industrial Average soared to above 22,000 for the first time in history. This historic rally in the Dow and other major indexes is thought to have been led by tech stocks, but this advance has been broad-based, as you can see in the chart below from CNBC.

Dow 22,000

The truth is, no one knows where this stock market is going. Corporate profits drive stock market valuations over the long-run, and profits are soaring. Market bulls will tell you that profits will soar even higher next year and the year after. That’s what they always say. But as we all know, the market tops out when it’s least expected.