A cooling labor market has reignited concerns that the Federal Reserve might have delayed too long in lowering interest rates.
The Bureau of Labor Statistics reported a gain of 114,000 nonfarm payroll jobs in July, falling short of the 175,000 forecasted by economists.
The unemployment rate rose to 4.3%, its highest level since October 2021.
This data has fueled worries that the central bank missed an opportunity to cut rates for the first time in four years, potentially missing a chance to address a slowdown that could tip the U.S. economy into recession.
Marc Pinto, head of Americas equities at Janus Henderson Investors, said the report is “definitely going to raise concerns now that the Fed is behind the eight ball.”
Fed Chair Jerome Powell had mentioned that a rate cut in September was “on the table,” pending supportive data, and acknowledged discussions about timing at the recent meeting. However, policymakers chose to keep rates at a 23-year high.
Joe Brusuelas, chief economist at RSM, suggested that the report almost guarantees a 25-basis-point cut in September and possibly more reductions in November and December.
He also noted that there is a “rational argument” for a 50-basis-point cut in September, with debates on this likely to intensify over the coming weeks.
Stephen Brown, deputy chief North America economist at Capital Economics, indicated that the Fed might even consider an interim cut before September. He also mentioned a 50-basis-point cut as a possibility.
Pinto expressed concern that a 50-basis-point cut could “send shock waves through the markets” by reinforcing the argument that the Fed is lagging.
Traders have adjusted their expectations, now forecasting a 70% chance of a half-percentage-point cut next month, according to rate futures contracts.
Acting Labor Secretary Julie Su downplayed fears of a major downturn, emphasizing that the jobs report is part of a broader trend. “We look at not just one month but trends.
The three-month average is 170,000, indicating continued strong job growth,” she said. She also highlighted a record high in prime-age workers’ job market participation, suggesting no imminent recession.
However, the 4.3% unemployment rate has triggered the Sahm Rule, an indicator developed by economist Claudia Sahm that has predicted past recessions with near-perfect accuracy.
The rule was activated when the three-month average of the unemployment rate increased by more than 0.5% from its 12-month low.
Sahm herself acknowledged the potential risk of recession in the coming months but did not see a current crisis. “The Sahm Rule is probably overplaying it right now to some extent” due to pandemic-related aftershocks, she said.
Her base case is that the Fed will start cutting rates in September unless a crisis occurs.
Powell addressed the Sahm Rule, emphasizing that the Fed is monitoring the labor market closely and remains prepared to respond if needed.
“We believe the labor market is in the process of a gradual normalization,” Powell said. “If we start to see something that looks to be more than that, then we’re well positioned to respond.”
The business community is keenly watching these developments, as any significant move by the Fed could ripple through financial markets and impact broader economic conditions.
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