July employment crisis brings interest rate cut forward to September
It looks like the market is finally getting what it has been waiting for for over a year.The Federal Reserve cuts interest rates.
The July jobs report released on Friday showed the labor market in much weaker shape than previously thought. Economists had expected demand for workers to cool and monthly employment growth to slow to 180,000. The economy created just 114,000 jobs..
Perhaps more importantly, the unemployment rate unexpectedly rose, jumping to 4.3% instead of expectations that it would match the previous month’s 4.1% figure. The highest level since October 2021This was at a time when the economic recovery following the pandemic and lockdown was still underway.
Just a few days ago, the Fed Risks on both sides of a dual missionThe Fed is required by law to pursue maximum employment and price stability, but the two are roughly balanced — that is, in the Fed’s view, there is roughly equal risk that the labor market will weaken and that inflation will accelerate or stagnate at too high levels.
According to the July employment report The balance is tilted towards labor market risksWhile 114,000 jobs is not too bad (and would have been considered a decent report in the not-too-distant past), and the unemployment rate of 4.3% is still low by historical standards, the sudden and unexpected drop in employment and rise in the unemployment rate indicate economic fragility that was only vaguely visible in previous economic data.
Fed Chairman Jerome Powell and other Fed officials He made it clear that he plans to cut back this year.The big differences among Fed officials seemed to be that some wanted to cut rates sooner than others, reflecting differing views of the risks to employment and inflation. Chairman Powell, at his Wednesday press conference, seemed clearly inclined to favor a cut in September, as long as the data plausibly justified a cut.
Employment Report Provide the needed justificationAs a result, we believe a September rate cut is set in stone, and even Fed officials who remain concerned about inflation risks are likely to be persuaded to agree to a cut now.
Sometimes it’s a recession, sometimes it’s not a recession
Work Former Federal Reserve economist Claudia Tham A sudden rise in the unemployment rate is cause for concern for the Fed: Sam’s research shows that an economy is usually already in a recession, known as a “recession,” when the three-month moving average of the unemployment rate rises by half a percentage point above the lowest three-month average over the past 12 months. “Samrull.”
What is noteworthy here is that The magnitude, speed and duration of the increase matterA slow rise in the unemployment rate is not necessarily a sign of a recession. A temporary spike in the unemployment rate is not a sign of a recession. And a rate approaching a threshold doesn’t tell us anything about the economy. To trigger a recession signal, the short-term average needs to rise 0.5 percentage points above the lowest average over the past year.
The threshold was crossed in July, according to the real-time Samrull indicator maintained by the Federal Reserve Bank of St. Louis. The three-month average unemployment rate is 0.53 higher than the recent lowest average..
Sam himself told financial reporters on Friday that he doesn’t think the economy is in a recession. “We’re not heading in a good direction.” One reason to think we may not be in a recession is that despite the sharp increase, the unemployment rate is still very low by historical standards: Before Trump took office, the unemployment rate hadn’t been as low as 4.3% since 2001.
Therm rules are: Migration surge The conflict over the southern border and the Biden administration’s issuance of illegal work permits. Adding millions to the workforceMoreover, the post-pandemic economy has given rise to once-reliable indicators of recession — an inverted yield curve, a sharp drop in leading economic indicators, and declining consumer confidence — that have turned out to be false (or premature) warnings.
One way to think about the Sumrule is not as a surefire way to detect recessions, and its definition is subjective and open to debate. A signal that the government should act to stabilize the economySam has advocated for automatic fiscal stabilization measures, such as stimulus checks, if the half-point threshold is crossed, but Fed officials would likely see the threshold as a reason to start cutting rates simply because that’s the economic toolkit they have.
Bad news is bad news
Ironically, the market got what it wanted, and then promptly became furious. The stock market plummeted The release of the jobs report reversed a recent pattern in which bad news for the economy was good news for stocks. The reaction is different this time because the market was already pricing in a rate cut. So the market no longer believes bad news is necessary for a rate cut.
However, the rate cut that the market was hoping for was Cut SelectionA soft-landing rate cut would signal an end to the risk of rising inflation, but not a concern of a sharp fall. Reduction of obligationsThe cuts needed to avoid or mitigate a recession. The bad news is just more bad news.
Federal Reserve Chairman Jerome Powell answers reporters’ questions during a Federal Open Market Committee press conference on July 31, 2024. (Federal Reserve Board via Flickr)
Employment statistics Providing the political backing for the Federal Reserve to cut interest ratesDemocrats were desperately searching for a “good news” Fed rate cut, one that would allow them to declare they had defeated the inflation demon, presumably through endless lectures about the evils of corporate greed. The problem for the Fed was that a voluntary good news rate cut before the election reeked of partisanship. If the economy wasn’t in danger, why not wait until after the election?
The Federal Reserve can justify a rate cut based on economic fundamentals, but the economic fundamentals of a weakening job market and the risk of a recession do not justify a rate cut. Much harder for Harris’ campaign They are trying to convince Americans that the Biden-Harris administration’s handling of the economy has not been the disaster that many polls lead them to believe.
The Federal Reserve’s future path is Cut by 0.25 points in SeptemberThe Fed is unlikely to heed calls for an emergency rate cut before its September meeting, or to expand the cut to a half-percentage point, as some Wall Street analysts are now predicting. Instead, the Fed is more likely to gradually ease rates at a measured pace, mindful of inflation exceeding its 2% target.
