Recent data suggesting a cooling labor market has heightened concerns that the Federal Reserve may have delayed lowering interest rates for too long. The Bureau of Labor Statistics reported on Friday that the U.S. economy added only 114,000 nonfarm payroll jobs in July, falling short of the 175,000 jobs anticipated by economists. Additionally, the unemployment rate rose to 4.3%, marking its highest level since October 2021.
Source: Bureau of Labor Statistics
These figures have reinforced fears among some Fed analysts that the central bank should have acted sooner to lower rates, potentially preempting a slowdown in the U.S. economy and averting a recession. Marc Pinto, head of Americas equities at Janus Henderson Investors, expressed these concerns to Yahoo Finance, noting that the report is likely to raise alarms about the Fed’s potential delay in addressing economic weaknesses.
Federal Reserve Chair Jerome Powell indicated on Wednesday that a rate cut in September is “on the table” provided that future data supports such a move. He also acknowledged that there was some discussion during the recent Fed meeting about the possibility of lowering rates in July. However, policymakers ultimately decided to maintain rates at their 23-year high.
Joe Brusuelas, chief economist at RSM, told Yahoo Finance that the latest jobs report almost guarantees a 25 basis point rate cut in September. He also suggested that additional cuts in November and December are now more likely. Brusuelas even argued that there is a rational case for a 50 basis point cut at the September 17-18 meeting, predicting that this argument will be a focal point of debate in the coming weeks.
Stephen Brown, deputy chief North America economist for Capital Economics, echoed the sentiment that the new employment data could increase speculation about an earlier-than-anticipated rate cut. Brown mentioned the possibility of an “intra-meeting move” before September and did not rule out a 50 basis point reduction.
However, Pinto from Janus Henderson warned that a significant cut of 50 basis points in September could shock the markets by underscoring the Fed’s delayed response. Such a move, he suggested, might send an unintended strong signal that could be poorly received by the market.
Following the release of the jobs data, traders adjusted their expectations, now estimating a 70% chance of a half-percentage-point cut next month, as indicated by rate futures contracts.
Despite these concerns, Acting Labor Secretary Julie Su offered a more optimistic perspective. In an interview with Yahoo Finance, she argued that the jobs report does not necessarily signal an impending sharp downturn in the labor market. She pointed to the three-month average job growth of 170,000 and noted other robust economic indicators, such as a record high in the participation rate of prime-age workers. Su emphasized that these metrics do not suggest an imminent recession.
Nonetheless, some Fed watchers are troubled by the unemployment rate reaching 4.3%, which has triggered the Sahm Rule. This rule, developed by economist Claudia Sahm, has historically predicted recessions with 100% accuracy since the early 1970s when the three-month average national unemployment rate rises more than 0.5% from its previous 12-month low.
In an interview with Yahoo Finance, Sahm herself advised caution in interpreting this rule. While she expressed concern about the softening labor market and the potential for a recession within the next three to six months, she did not believe the economy was currently in a recession. She suggested that the Sahm Rule might be slightly overstating the situation due to the lingering effects of the pandemic.
Sahm’s baseline expectation is that the Fed will begin cutting rates in September, barring a crisis situation, which she noted is not the current state. She acknowledged, however, that the labor market conditions are not what Fed Chair Powell had hoped to see.
During his remarks on Wednesday, Powell addressed the Sahm Rule, indicating that the Fed is closely monitoring for any signs of a sharper downturn in the labor market. He reiterated the Fed’s belief in a “gradual normalization” of the labor market and assured that the Fed is well-positioned to respond if the situation appears more severe.
