Source: Jin10 Data
Once the cooling of the job market begins, it is often difficult to stop and the Federal Reserve may already be behind the curve...
Federal Reserve officials chose not to cut interest rates this week because policy makers want more data to ensure inflation is truly under control. While this approach is cautious on inflation, Friday's employment reports underscored the fact that this approach could be risky when it comes to the labor market.
On Friday, the data showed that the unemployment rate unexpectedly rose to 4.3%, higher than the previous 4.1%, as hiring slowed dramatically. US July's new employment decreased to 0.114 million, lower than the expected 0.175 million, and the employment growth of the previous months also revised downwards.
This combination may lead to concerns that the Fed waited too long to cut interest rates and may have fallen behind the curve, making it difficult to stop or reverse the slowdown in the job market.
Higher interest rates help curb inflation by slowing demand in the economy. When the cost of borrowing for housing or expanding business is higher, people reduce their spending, and companies also hire fewer workers. With weaker economic activities, it is difficult for businesses to raise prices quickly, which mitigates inflation.
But this chain reaction could exact a serious toll on the job market. Once the cooldown in the job market starts, it is difficult to stop. As economists often say, the unemployment rate skyrockets like a rocket and falls like a feather.
Given this risk, as well as the fact that inflation has visibly moderated, Fed policymakers are increasingly aware that they may go too far and cause a severe slowdown in the economy, driving up the unemployment rate.
These concerns were not enough to prompt the Fed to cut rates at this week's meeting. But Powell was clear that policymakers will be watching the forthcoming employment data carefully for any signs of a deteriorating job market, suggesting that they are ready to act if they see sudden signs of deterioration.
Powell said at this week's press conference that a broad array of indicators suggests that the labor market is back to pre-pandemic levels, and added, "I don't want to see further weakening in the labor market."
In light of this, Friday's weak employment data may further cement the Fed's plans to cut rates in September, perhaps with more rate cuts later this year. Investors have already significantly increased the likelihood of a 50 basis point rate cut at the Fed's September meeting. The Fed will receive another employment report before its next meeting ends on September 18.
Some critics of the Fed have begun to argue that waiting until the September meeting to cut rates is a mistake.
The rise in the unemployment rate may heighten this concern, particularly as the potential worry about persistent inflation has fallen out of people's views.
Adjustments to the federal fund rate take time to have an effect, so many worry that if the Fed waits until there are serious signs of panic in the job market to begin lowering borrowing costs, it may be too late.
Neil Dutta, head of Renaissance Macro Research, wrote in a post-meeting note, "By the time the Fed begins to cut, they will find they are behind the curve."
But economists often point out that one reason the Fed is being cautious rather than rushing to cut rates is that it has twice misjudged the inflation situation in the past: it responded too slowly when inflation spiked in 2021, inviting widespread criticism, and it was too optimistic last year as price pressures began to cool.
Powell said this week, "We are weighing the risks of acting too early and the risks of acting too late. It's a very difficult judgment."
Editor / jayden