Is "another year of good growth" ahead for the US economy?

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Lauren Brice: Welcome to J.P. Morgan's Making Sense. I'm Lauren Brice, a member of the North America sales team. And I am joined by Mike Feroli, our chief U.S. economist. Mike, thank you for joining us.

Mike Feroli: Thanks for having me.

Lauren Brice: Typically, on the first Friday of the month, we meet to discuss the implications for the most recent jobs report and how it influences are thinking on the path forward for the economy and for the Fed. Now, as we don't have that data on hand as of today, there's still plenty to talk about as we move through the first quarter of the year. So let's start with this week's claims and JOLTS data, which caused quite the move in rates markets yesterday. Did they change the forecast for NFP, which we should be getting on the 11th?

Mike Feroli: No. In a word, on the claims data. As you've noticed, probably the weather has been kind of bad and claims respond to the weather. We're inclined to dismiss some of the signal from the rise in jobless claims last week. The JOLTS number was, I think, a more, reliable signal. And that does show that job openings resumed a decline after kind of stalling out for about six months. That said, we continue to look for, about 75,000 jobs, to be gained in January. In part, the weather effects actually should be favorable for the jobs report because that relates to the survey week, which was the week of the 12th, which was better weather. So we continue to look for a good report, 75,000 with a steady unemployment rate of 4.4%,

Lauren Brice: And we are more optimistic versus the street around our expectations, for the health of the labor market this year, with a peak of 4.5% in the first quarter before drifting lower to 4.2% by year end. What's driving the forecast here?

Mike Feroli: Yeah. So we think we've been seeing stabilization, in the labor market over the last few months. Labor market had deteriorated, softened a little bit in the third quarter of last year. But more recently, it does look like things are on better footing. I would also point out that we think that final demand will be, well supported this year, in part because of fiscal policy and good final demand should support labor demand. So we think that in conjunction with a very weak labor supply trends, should result in some, tightening up in the labor market.

Lauren Brice: And reading into the contours of our expectations for next week's NFP, we're getting benchmark revisions to start the year. What are you looking for there? And is that going to provide much of a signal to you?

Mike Feroli: So we, I think, we and everyone kind of know the direction of these revisions given what was reported in September. What we'll just learn is the monthly path of job growth, which we expect to be quite a bit lower. So I don't think it should be a surprise to anyone, but I think it will just underscore how weak labor supply trends have been last year.

Lauren Brice: Sure, okay. And let's now talk about the economy more broadly. You note that, private domestic final demand is running around 2.5%, close to last year's average. What are the main drivers supporting this stability? And do you see any risks to the trend as we move forward?

Mike Feroli: So one I had already mentioned, which is fiscal policy should give us support to consumer spending. Some of the tax cuts, from the big, beautiful bill, should start kicking in, actually in January and then again and refund season as we move into February and March. And then, of course, CapEx is being supported by the AI boom. Risks, I think are manifold. Policy risk. We can't dismiss, trade tensions, even though we think we're past that, continue to flare up. So I definitely think policy risks remain there. But again, our main cases that, we see another good year, another year of good growth, I should say.

Lauren Brice: You’ve already mentioned this, but something that's certainly top of mind, for investors is, tech earnings, CapEx spend, which, you know, continues to outpace expectations. How sustainable do you think, you know, the tech driven investment grade is in terms of the broader spill over to the economy?

Mike Feroli: Yeah, certainly. I mean, you know, the news we've gotten over the last few days, suggests that at least for 2026, we should continue to see very strong, tech related CapEx. The spillover to the broader economy is actually, maybe a little bit more limited than you might think, given that a lot of that spending is on imported chips. And so the addition to overall GDP is not as huge as maybe those numbers suggest. In addition, this isn't very labor-intensive spending either. So the spillovers right now, not that great. However, the potential is that if this does indeed, juice productivity growth over the medium to longer run, I think that would be the more, meaningful spillover.

Lauren Brice: So let's turn to the Fed now. Our forecast remains for no further change to monetary policy, which is at odds with, market pricing of anywhere between 55 and 57 basis points. What do you think we need to see in the data for the folds to be realized?

Mike Feroli: Yeah, I think to get a cut in the near-term would require, deterioration in the labor market. So if we were to see the unemployment rate move up to four, six, four, seven, I think that could get us a cut before the middle of the year. Inflation also matters, but I don't think, you know, the turn in inflation would have to be, more enduring. It would have to last several months before I think the committee, could gain confidence that we're moving back below 2.5% on core inflation in a way that could allow them to ease rates.

Lauren Brice: And with Kevin Warsh's nomination as Fed chair, you suggest he might advocate, for rate cuts. But the committee is likely to remain on hold. How do you see the dynamics between the new chair and the rest of the FOMC evolving, especially if inflation remains sticky and growth remain strong, as is our forecast?

Mike Feroli: So, I guess I would say the new chair is likely to advocate for easier policy. However, we do think the committee may be reluctant to go along and that they won't be forced into voting on something they don't want to do. So, given, the message we got from the FOMC last month and given our economic forecasts, we think the majority of the committee will, opt to keep rates on hold here.

Lauren Brice: And can we step through the next few months operationally, when will Warsh likely be confirmed by the Senate? What happens if Miran stays on if Powell stays on?

Mike Feroli: Mm-hm. So our best guess is that, Warsh is confirmed by the Senate sometime in March. We haven't heard yet whether he is being nominated for Miron’s seat. We assume he is. In which case, once confirmed, we would expect Warsh to take Miron’s seat. And then, he would have a second vote. Second confirmation vote to become Fed chair. At that point, as many people know, Powell can stay on through 2028. I'm personally very uncertain whether he does or not. There is a case that he may, there's a case he may not. He's kept his cards close to the vest, and we'll just have to wait and learn.

Lauren Brice: And whilst it's widely expected by us that a new venture could not alone sway in the direction of policy, and the Fed chair's role is, you know, more so one of gaining consensus within the committee. What are you expecting from Warsh in terms of communications, both in terms of rate policy? And the balance sheet, in light of the administration's objectives?

Mike Feroli: I think that's a tricky one. As I mentioned earlier, he's clearly advocated recently for easier monetary policy. If the committee doesn't go along with them. I think there's a question of whether he speaks for the committee or speaks for himself. And if he doesn't speak for the committee, I think there's a risk he loses a lot of the soft power as chair. On the balance sheet, that may be, a little easier for the chair to bring the committee along with him because many on the committee already want a smaller balance sheet. I don't, their questions are more about implementation than the actual desire to have a smaller balance sheet.

Lauren Brice: As you mentioned, Warsh, has a preference for a smaller balance sheet. But what market impacts do you anticipate if the Fed does accelerate balance sheet runoff? And how might this interact with the administration's desire for lower mortgage rates?

Mike Feroli: Yeah. So, were the Fed to engineer a smaller balance sheet through renewed cut that could obviously put upward pressure on longer term interest rates, which, as you allude to, is at odds with the administration's preferences there. So I think that's the first challenge to a smaller balance sheet. The second challenge is that you know, we're getting near the lowest comfortable level of reserve balances in the banking system. And so to go much further would require complementary changes to liquidity regulations, which could take time.

Lauren Brice: And then lastly, Warsh has been known to criticize the Fed's communication strategy. How were you thinking about this as a close Fed speak watcher?

Mike Feroli: I guess we'll have to see how his communication strategy evolves here. One thing I would point out is, you know, he's been critical of forward guidance. I would say Chair Powell hasn't been giving all that much forward guidance. If you just look back to the, January FOMC meeting, he didn't really say when or in which direction the next move would be. So at least initially, I don't think that would be such a drastic break from where we are now.

Lauren Brice: Well, that sounds like a good place to close, Mike. Having covered the labor market, the broader economy, our expectations for the Fed and what we can expect from Warsh in initial months. Mike, thank you so much for joining us.

Mike Feroli: Thanks for having me.

Lauren Brice: Thank you to our listeners very much for joining. And we hope that you will join us again next month.

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