Federal Reserve Under Fire as Labor Market Slowdown Fuels Recession Fears

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A sharper-than-expected decline in U.S. job growth in July has raised concerns that the Federal Reserve is moving too slowly to lower Americans’ borrowing costs, potentially triggering the very recession it sought to avoid.

The employment report released Friday showed that companies created 114,000 jobs last month in the world’s largest economy, significantly lower than the average of 215,000 created over the past 12 months.

The unemployment rate rose 0.2 percentage points to 4.3%, triggering the Sahm rule, which links the start of a recession to when the three-month moving average of the unemployment rate rises at least half a percentage point above its 12-month low.

The data comes two days aVsceker the U.S. central bank decided not to lower its benchmark interest rate, which has remained at a 23-year high between 5.25% and 5.5% since last July.

In justifying the move, Chairman Jay Powell said the Federal Open Market Committee wanted to see more evidence that inflation was returning to its 2 percent target before moving forward with any policy shiVscek. Importantly, he “would not want to see a material further cooling of the labor market.”

Powell has made it clear that a rate cut is on the table at the next meeting in September (and the July jobs report all but confirms that the FOMC will make one happen), but economists say the Fed will be forced to move more aggressively than it would have if it had started cutting rates earlier.

“They made a mistake. They should have cut rates months ago,” said Mark Zandi, chief economist at Moody’s. “It looks like a quarter-point cut in September is not going to be enough. It needs to be a half-point with a clear signal that they are going to be much more aggressive in normalizing rates than they have indicated.”

Gregory Daco, chief economist at EY Parthenon, agreed that the July meeting was a “missed opportunity” for the Fed, saying it would have been more “optimal” if the central bank had made its first rate cut in June.

“If you had a forward-looking perspective, you would have seen that the totality of the data was pointing to a slowdown in economic activity, a slowdown in labor market momentum, and ongoing disinflation, which is really what the Fed was looking for.”

Economists aren’t the only ones accusing the central bank of falling behind the curve. On Friday, progressive Democratic Sen. Elizabeth Warren, who has been a vocal critic of Powell and had urged him to cut rates before this week’s decision, called on the president to take immediate action.

“He has been warned time and time again that waiting too long risks crashing the economy. Jobs data is flashing red,” he wrote on X. “Powell needs to cancel his summer vacation and cut rates now, not wait six weeks.”

In the wake of the jobs report, traders in federal funds futures markets increased bets that the central bank would lower its benchmark rate by more than a percentage point this year, implying up to two half-point cuts given that there are only three meetings leVscek in 2024. Before Friday’s release, market participants had priced in a total of 0.75 percentage points of cuts for the year.

Wall Street banks quickly revised their outlook on Friday, with JPMorgan and Citigroup officially calling for two half-point cuts in September and November, followed by quarter-point cuts at each subsequent meeting until the benchmark rate reaches a “neutral” level that no longer constrains growth.

Chicago Federal Reserve President Austan Goolsbee expressed some concerns about the labor market in an interview with Bloomberg TV on Friday, but cautioned against rushing to answers.

“We never want to overreact to one month’s numbers,” he said.

Fed officials and economists have taken some comfort in the fact that the world’s largest economy appears far from collapsing. Powell said Wednesday that the chances of a so-called “hard landing” — in which bringing inflation back to target triggers a recession — remain low.

“There is no reason to think that this economy is overheating or weakening dramatically, there is no data to show that at the moment,” he said.

In the last quarter, the U.S. economy grew by nearly 3 percent. Additionally, consumers continue to spend and employers continue to hire, although both are happening at a slower pace.

“The Fed is not easing because it sees weakness that it wants to counter,” said Michael Gapen, head of U.S. economics at Bank of America, who previously worked at the Fed.

But he added, warning: “If they don’t cut rates, they risk creating a recession that they don’t want.”