A weaker than expected jobs report solidifies the case for the Federal Reserve to restart interest rate cuts after a long pause at its meeting later this month, quelling debate that had emerged this summer as inflation risks also intensified.
Officials have faced difficult decisions over the trajectory for interest rates amid mixed economic signals. Monthly jobs growth has sharply slowed alongside business activity, but the unemployment rate has stayed relatively stable and layoffs remain low. Meanwhile, price pressures tied to tariffs have raised inflation, although not as much as initially feared.
That has created a conundrum for the Fed. Policymakers do not want to wait too long to lower interest rates for fear of causing undue harm to the labor market. But they also do not want to provide relief prematurely and risk allowing inflation to intensify. Rates are now set in a range of 4.25 to 4.5 percent.
Jerome H. Powell, the Fed chair, sought to find some middle ground in a speech late last month, sending his strongest signal yet that rate cuts were coming. Still, he made clear that officials would proceed slowly with those reductions.
“The balance of risks appears to be shifting,” Mr. Powell said in his final speech as Fed chair at an annual conference hosted by the Reserve Bank of Kansas City in Jackson, Wyo. With borrowing costs weighing on the economy, the labor market softening and inflationary pressures more contained than initially feared, “the shifting balance of risks may warrant adjusting our policy stance,” he said.
Mr. Powell stressed that the labor market was in a “curious kind of balance,” with demand for new hires slowing and the supply of available workers contracting as a result of President Trump’s immigration restrictions.
“This unusual situation suggests that downside risks to employment are rising,” he said. “And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
August’s jobs report bolstered this view and is likely to convince officials who had been skeptical about the need to lower borrowing costs that the case for cutting is more clear-cut.
It is also likely to prompt discussions about how fast the Fed should proceed with its rate reductions. Already, one influential governor raised the prospects of a bigger-than-usual move compared to the central bank’s typical quarter-point cadence.
Christopher J. Waller, one of two Fed governors who wanted to cut interest rates in July, recently backed a quarter-point cut in September. But he also suggested that he could support something more aggressive if August’s data “points to a substantially weakening economy and inflation remains well contained.”
The Fed will get another inflation report before its meeting, when the Consumer Price Index for August is released next week.
Mr. Waller, who is seen as a contender to replace Mr. Powell when his term as chair ends in May, was one of two officials to dissent from the Fed’s decision in July to hold interest rates steady. At the time, he warned his colleagues against waiting for the labor market to deteriorate before taking action.
“While there are signs of a weakening labor market, I worry that conditions could deteriorate further and quite rapidly,” he said in his recent remarks. He added that he thought it was important that the Fed “not wait until such a deterioration is underway and risk falling behind the curve in setting appropriate monetary policy.”
There may also be a new member voting on interest rates at the September meeting. The Trump administration is trying to accelerate the appointment of Stephen Miran to the Board of Governors. Mr. Miran, who said at his Senate confirmation hearing on Thursday that he would take only a temporary leave from his role as one of the president’s top economic advisers if confirmed for the Fed job, is likely to back a significant interest rate cut.
But there are reasons to think that a half-point cut will not be widely support unless the labor market starts to show much more serious signs of cracking. Most officials see interest rates at their current settings as “modestly” restraining business activity, meaning there might not be too far to go before they reached their desired level.
Most policymakers have discussed getting interest rates closer to what they consider a neutral setting that neither stimulates growth now slows it down. Moving in big increments would raise the risk that officials lower interest rates more than what is best to ensure that inflation stays contained.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
The post Weak Jobs Report Strengthens Case for Rate Cuts appeared first on New York Times.
