A sharper than expected fall in US jobs growth in July has raised concerns that the Federal Reserve is moving too slowly to lower borrowing costs for Americans, risking the very recession it has been trying to avoid.
The employment report released on Friday showed companies added 114,000 positions across the world’s largest economy last month, significantly lower than the 215,000 average gain over the past 12 months.
The unemployment rate rose 0.2 percentage points to 4.3 per cent, triggering the Sahm Rule, which links the start of a recession to when the three-month moving average of the jobless rate rises at least half a percentage point above its low over the past 12 months.
The data comes two days after the US central bank opted against lowering its benchmark interest rate, which has remained at a 23-year high of 5.25 per cent to 5.5 per cent since last July.
In justifying the decision, chair Jay Powell said the Federal Open Market Committee wanted to see more evidence that inflation is headed back to its 2 per cent target before following through with any monetary policy pivot. Importantly, he stressed he “would not like to see material further cooling in the labour market”.
Powell made clear a rate reduction is on the table at the next meeting in September — and the July jobs report all but confirms the FOMC will deliver one — but economists say the Fed will be forced to move more aggressively than would have been the case had it started cutting rates earlier.
“They made a mistake. They should have been cutting rates months ago,” said Mark Zandi, chief economist at Moody’s. “It feels like a quarter-point cut in September isn’t going to be enough. It’s got to be a half-point with a clear signal that they are going to be much more aggressive in normalising rates than they have been indicating.”
Gregory Daco, chief economist at EY Parthenon, agreed the July meeting was a “missed opportunity” for the Fed, saying it would have been more “optimal” had the central bank delivered its first rate cut in June.
“If you had a forward-looking perspective, you were seeing that the totality of the data was pointing towards a slowing in economic activity, a slowing in labour market momentum and ongoing disinflation, which is really what the Fed has been after.”
Economists are not the only ones to accuse the central bank of falling behind the curve. On Friday, progressive Democratic senator Elizabeth Warren — who has been a staunch critic of Powell and prior to this week’s decision urged him to cut rates — called on the chair to take imminent action.
“He’s been warned over and over again that waiting too long risks driving the economy into a ditch. The jobs data is flashing red,” she wrote on X. “Powell needs to cancel his summer vacation and cut rates now — not wait six weeks.”
In the wake of the jobs report, traders in federal funds futures markets boosted bets that the central bank would lower its policy rate more than a full percentage point this year, implying as many as two half-point cuts given there are only three meetings left in 2024. Prior to Friday’s release, market participants had priced in a total of 0.75 percentage points of cuts for the year.
Wall Street banks on Friday rapidly revised their outlooks, with JPMorgan and Citigroup officially calling for two half-point reductions in September and November followed by quarter-point cuts at every meeting thereafter until the policy rate reached a “neutral” level that no longer constrained growth.
Austan Goolsbee, president of the Chicago Fed, shared some of the concern about the labour market in an interview with Bloomberg TV on Friday, but urged against a rushed response.
“We’d never want to overreact to any one months’ numbers,” he said.
Fed officials and economists have taken some comfort in the fact that the world’s largest economy looks far from collapsing. Powell on Wednesday said the chances of a so-called “hard landing” — whereby getting inflation back to target prompts a recession — still remained low.
“You don’t see any reason to think that this economy is either overheating or sharply weakening, that’s just not in the data right now,” he said.
In the past quarter, the US economy grew nearly 3 per cent. Moreover, consumers are still spending and employers are still hiring, even if both are happening at a slower pace.
“The Fed is not easing because it sees weakness that it wants to counteract,” said Michael Gapen, head of US economics at Bank of America, who previously worked at the Fed.
But in a warning shot, he added: “If they don’t cut rates, they do risk creating a recession that they don’t want.”