The Fed has told us they are watching the job market “carefully” for “cracks” as a condition to start the easing cycle.  Jerome Powell reiterated that today, saying if the job market “unexpectedly weakens,” it would cause the Fed to “react.”

Add to that, the Chicago Fed President, Austan Goolsbee said today that the goal is to “get inflation down without stressing the labor market.” 

Keep in mind the May unemployment rate was last at a 28-month high, and the under-employment rate is at 30-month highs. 

With that in mind, remember, we’ve talked about the playbook executed by the European Central Bank and the Bank of Canada last month, where they positioned the start of the easing cycle as just “removing restriction” — as to not fuel market euphoria about the easing cycle.

That’s an easy playbook for the Fed to follow, if the job numbers come in soft, reducing restriction just to maintain the level of restriction as inflation falls.

On a related note, the top central banker from the Fed, ECB and the Bank of Brazil today sat on a stage in Portugal and fielded questions.

Most notably, the Brazilian central banker warned that the “higher for longer” rate regime in the Western world (mainly the Fed) combined with record high debt will “start to stretch (global) liquidity.”

He noted that emerging market countries feel the pain first, when liquidity becomes “stretched.”  And he noted that in recent weeks, there are signs of that happening.

Perhaps not coincidentally, yesterday the Fed’s measure of liquidity (SOFR) hit the most “stretched” level since early January. 

And perhaps no coincidence, the Bank of Japan, which was the (very important) global liquidity provider throughout the Western world’s interest rate tightening cycle, is due this month to announce its plan to begin the end of its QE program (begin to taper bond purchases/ removing liquidity from global markets).

As I said in my March note, when the BOJ made its first step toward exiting its role as the global liquidity provider, “global central banks (led by the Fed) may now have less leeway to hold rates too high, for too long.”  

As the head of the Brazilian central bank alluded to today, doing so risks global liquidity swinging the direction of too tight (i.e. a liquidity shock).