The past two years have been eventful. From Liberation Day to the closure of the Strait of Hormuz, the global economy has experienced several major shocks. And yet a simple snapshot of financial markets suggests remarkably little has changed. The S&P 500 has returned an average of 19% per year over the last three years.
On the fixed income side, the 10-year U.S. Treasury yield sits at nearly the same level it did two years ago despite considerable volatility along the way and 175 basis points (1.75%) of Federal Reserve rate cuts. Even oil prices were nearly identical to where they were one year ago prior to the recent uptick following President Trump’s comments that the Iran ceasefire may be over.
In fact, the most notable trend in Figure 1 is that inflation has moved higher while the federal funds rate has moved lower. That combination may help explain why the Federal Reserve has become increasingly cautious about declaring victory over inflation. Two years ago, policymakers were discussing insurance rate cuts. Today, they are debating the possibility of insurance rate hikes. First, to “insure” that the labor market did not crack and now to “insure” that inflation does not become entrenched. A virtual mirror image.
What may ultimately tilt the balance toward patience, however, is a remarkably familiar labor market pattern. In both 2024 and 2025, payroll growth remained relatively strong during the spring before slowing noticeably during the summer. That slowdown helped justify the Fed's rate cuts in 2024. Today, a similar pattern may once again influence the policy debate, only this time by reducing the urgency of rate hikes.
Figure 1. Select Financial and Economic Metrics Over the Last Few Years
Sources: Bloomberg L.P., and Potomac. Data as of July 3,, 2026. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Fed Rate Cuts
After raising interest rates for several years to combat inflation, the Federal Reserve shifted its focus in late 2024 toward preserving the labor market. At the time, payroll growth slowed from an average of 254,000 jobs during the spring to just 154,000 jobs over the summer months (see Figure 2).
Figure 2. Unrevised Monthly Change in Nonfarm Payrolls in 2024 (Thous.)
Sources: Bureau of Labor Statistics, Bloomberg L.P., and Potomac. Data as of December 2024.
Concerns were further amplified when the Sahm Rule triggered, a historically reliable recession indicator that occurs when the three-month average unemployment rate rises at least 0.5 percentage points above its low over the previous 12 months. Historically, this indicator has preceded every recession since the 1970s (see Figure 3). In response, the Fed delivered a 50-basis-point insurance rate cut in September followed by another 25-basis-point cut in December, stating that, "The Committee is attentive to the risks to both sides of its dual mandate."
Figure 3. Real-Time Sahm Rule Recession Indicator vs. U.S. Recession (%)
Sources: Bureau of Labor Statistics, Bloomberg L.P., and Potomac. Data as of December 2024. Note: Shaded regions denote periods of U.S. recession.
Fast Forward Two Years
Fast forward two years and the June employment report once again showed a slowdown in hiring, with payroll growth totaling just 57,000 jobs as the leisure and hospitality sector shed 61,000 positions despite ongoing World Cup activities.
While one payroll report is not enough to establish a trend, the recent slowdown fits the pattern that has developed over the past two years. Using the initial payroll estimates available at the time of each release, payroll growth averaged 223,000 jobs per month between March and May in 2024 and 2025 before slowing to an average of just 117,000 jobs between June and August. Thus far, payroll growth in 2026 has followed a similar path, but at a lower level (see Figure 4).
Figure 4. Average Monthly Change in Nonfarm Payrolls (2024 – 2026, Thous.)
Sources: Bureau of Labor Statistics, Bloomberg L.P., and Potomac. Data as of June 2026. Note: Includes all months for 2024 and 2025 and January 2026 through June 2026.
The difference this time around is that the monetary policy backdrop has changed dramatically. Two years ago, inflation was trending lower while the labor market was weakening. Today, inflation has been moving higher, driven in part by the U.S.-Iran conflict and higher commodity prices (though easing noticeably of late).
That is why investors welcomed the weaker-than-expected jobs report. A softer labor market gives the Fed more flexibility. Rather than feeling compelled to deliver insurance rate hikes, policymakers may instead choose to wait for additional inflation data before tightening policy. That shift was immediately reflected in Fed funds futures, where markets reduced the number of expected rate hikes between now and the spring of 2027 from roughly two to one following the June employment report (see Figure 5). Though it is worth noting that the curve has since reverted with the Iran ceasefire causing oil prices to bubble up once again.
Figure 5. Implied Number of Rate Hikes Priced in by Fed Fund Futures
Sources: Chicago Board of Trade, Bloomberg L.P., and Potomac. Data as of July 6, 2026. All forecasts are expressions of opinions and are subject to change without notice and are not intended to be a guarantee.
The Bottom Line
There is a certain irony that the same pattern of summer labor market weakness that helped justify insurance rate cuts in 2024 may now reduce the urgency for insurance rate hikes in 2026.
That does not necessarily mean the Fed is finished worrying about inflation. In fact, Figure 6 shows that core PCE inflation is the one major indicator that looks materially different than it did two years ago. A softer labor market may give policymakers the flexibility to wait, but unless inflation begins moving lower again, it is unlikely to eliminate the possibility of additional tightening altogether.
Figure 6. Core PCE Inflation YoY% (January 2024 to Present)
Sources: Bureau of Labor Statistics, Bloomberg L.P., and Potomac. Data as of June 2026. Note: “PCE” is the personal consumption expenditure deflator and it is used to adjust for inflation in gross domestic product calculations.
Weekly “Keeping it Strait” Highlights:
Economic surprise indices across the United States, Europe, and China continued to improve last week. Total vehicle sales in the U.S. and PMIs in Europe and China each picked up. It is possible that lower oil prices are providing a bit of a lift to economic data.
Atlanta Fed’s GDPNowcast is tracking at just 1.4% for the second quarter but this is being driven by a widening of the trade deficit in May. While imports jumped as capital goods imports hit a record, much of this is related to the ongoing AI spend. Absent the drag for net exports, real GDP would be closer to 2.6%.
Crude oil volatility has picked up again of late with President Trump declaring that the U.S. – Iran ceasefire is over. Markets seem to be taking this in stride, but it will take some time to determine if this will have a lasting impact on commodity markets. We doubt prices across the spectrum return to where they were at the height of the war.
