A cyclist passes the Federal Reserve headquarters in Washington. — Reuters
WASHINGTON: A weaker-than-expected July jobs report is calling into question the US Federal Reserve’s (Fed) wait-and-see approach to interest-rate cuts, boosting the likelihood of a reduction at the central bank’s next meeting in September.
Data published last Friday by the Bureau of Labour Statistics showed payroll gains slowed to just 35,000 on average over the last three months, marking the slowest pace of hiring since the onset of the pandemic in 2020.
The unemployment rate ticked up to 4.2%.
“It certainly does look like if the Fed had had these numbers – especially the big revisions lower than we had to the June and May data – before the meeting on Wednesday, they very well could have been cutting on Wednesday,” said Veronica Clark, an economist at Citi.
The report comes after the Federal Open Market Committee (FOMC) decided to hold interest rates steady earlier last week for a fifth consecutive time.
Two governors dissented in favour of a quarter-point rate cut, for the first time since 1993.
Fed chair Jerome Powell told reporters afterward that while there are downside risks for the jobs market, it remained solid nonetheless.
After the release of the numbers last Friday morning, investors boosted the odds of a September rate cut to almost 90%, from around 40% the day before, according to interest-rate futures contracts.
Fed officials speaking last Friday, before and after the data were published, offered differing views on the risks.
“I’m not that surprised that the labour market is slowing,” Minneapolis Fed president Neel Kashkari said in an interview on CNN.
“The data was worse than I had expected, but when tariffs go up, you expect prices to go up and the economy to slow, and we’re seeing both of those effects.”
He added that he believes the labour market is “gently slowing”.
Atlanta Fed president Raphael Bostic, in an interview on CNBC, showed somewhat more concern.
“The numbers today and the revisions, in an important way, suggest that maybe the economy and the labour market are weakening more broadly,” he said.
“That does also suggest that the risks to the employment side of the mandate are maybe coming more into balance with those in inflation, and that’s something that I’ll really have to look at as I think about the appropriate path for policy.”
Asked if he would have supported a different move earlier this week with the jobs report on hand, Bostic said, “I don’t think so,” adding that in many ways, the labour market still looks good.
Cleveland Fed president Beth Hammack, speaking on Bloomberg TV after the numbers came out, said the labour market still looked healthy – though it was a “disappointing report to be sure”.
Ahead of the report, Fed governors Christopher Waller and Michelle Bowman issued statements explaining why they dissented Wednesday from the decision to hold rates steady, expressing concerns that hesitance to cut rates could risk unnecessary damage to the labour market.
President Donald Trump, commenting on social media after the Fed published the Waller and Bowman statements, said, “STRONG DISSENTS ON FED BOARD. IT WILL ONLY GET STRONGER!”
Earlier last Friday, in a separate post, he urged other members of the Fed’s Board of Governors to “assume control” if Powell continues to favour holding rates.
Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington, said July’s jobs report is “a little disappointing in terms of the resilience story for the job market”.
Tang, who doesn’t expect the Fed to cut rates until December, said the Fed’s job in assessing the impact of tariffs on employment and inflation has now become “a little bit more difficult”.
Some traders in Secured Overnight Financing Rate futures took positions that would benefit from a half-point cut in September, and at least one economist noted the possibility of an outsized move.
“We remain confident in our expectation that the FOMC will cut at the next meeting,” Tom Simons, senior economist at Jefferies, wrote in a note to clients. — Bloomberg
