New indications of a slowing labor market are intensifying worries that the Federal Reserve may have delayed too long in reducing interest rates.
The Bureau of Labor Statistics' data released Friday revealed that the US economy added only 114,000 nonfarm payroll jobs in July, significantly below the 175,000 forecasted by economists. Additionally, the unemployment rate climbed to 4.3%, marking its highest point since October 2021.
This latest report has heightened anxieties among some analysts who believe the Fed should have opted to cut rates at this week’s meeting to preempt a potential economic downturn. "This report is certainly going to raise concerns that the Fed is falling behind," stated Marc Pinto, head of Americas equities at Janus Henderson Investors, to Yahoo Finance.
Federal Reserve Chair Jerome Powell indicated on Wednesday that a rate cut in September remains a possibility, contingent on supportive data, while acknowledging that the timing of a cut was discussed during the recent meeting. However, policymakers decided to maintain rates at a 23-year high.
RSM chief economist Joe Brusuelas told Yahoo Finance that the jobs report "practically guarantees a 25-basis-point cut in September," with further cuts in November and December now on the table. Brusuelas also mentioned the possibility of a 50-basis-point cut at the September 17-18 meeting, a debate expected to unfold over the next six weeks.
Stephen Brown, deputy chief North America economist for Capital Economics, noted that the new data could even prompt speculation about an "intra-meeting move" before the scheduled September meeting, also suggesting a 50-basis-point cut as a potential outcome.
However, Pinto expressed concern that such a substantial cut could "send shock waves through the markets," potentially reinforcing the notion that the Fed is lagging.
In response to the jobs report, traders adjusted their expectations on Friday, now predicting a 70% likelihood of a half-percentage-point cut next month, according to rate futures contracts.
Acting Labor Secretary Julie Su downplayed fears of a significant labor market downturn, emphasizing the importance of examining trends over single-month data. She pointed out the three-month average job growth remains robust at 170,000 and highlighted a new record high for prime-age worker participation.
Despite these reassurances, some analysts are troubled by the 4.3% unemployment rate triggering the Sahm Rule, a recession predictor with a strong historical track record. This rule was met when the three-month average unemployment rate increased by more than 0.5% from the previous 12-month low.
Claudia Sahm, the economist behind the rule, advised caution in interpreting this signal, attributing part of the economic fluctuations to the pandemic's aftermath. Although she does not believe the US is currently in a recession, she expressed concern about potential future downturns within six months.
Fed Chair Powell, when asked about the Sahm Rule, confirmed that the central bank is vigilantly monitoring the labor market for signs of a sharper decline. Powell reiterated the Fed's belief that the labor market is undergoing a "gradual normalization" and assured that the Fed is prepared to act if conditions deteriorate further.
