Federal Reserve official asserts gloomy employment figures support argument for three interest rate decreases
Federal Reserve Considers Interest Rate Cut Amid Weak Job Market
President Donald Trump has the opportunity to appoint another member to the Federal Reserve's board of governors, following a recent resignation. As the Fed's schedule for 2025 includes only three meetings, expectations on Wall Street suggest a potential interest rate cut at its September meeting.
The weaker-than-expected U.S. job market report, which showed that employers hired far fewer workers last month than initially expected, has prompted the Fed to reconsider its earlier "wait and see" approach. The recent indicators of weakening demand and labor market fragility, alongside a mild pickup in inflation, have led the Fed to consider lowering interest rates to avoid unnecessarily eroding labor market conditions and to support employment.
The potential interest rate cuts are intended to balance inflation control while preventing further job market weakness. However, some Fed officials remain cautious, pointing out that low unemployment (around 4.2%) suggests continued labor market strength.
Michelle Bowman, a top official at the Federal Reserve, believes that lower interest rates are necessary following the weaker-than-expected job market report. Nine other Fed officials, however, voted to keep interest rates steady, countering Bowman's views.
Fed Chair Jerome Powell, on the other hand, wants to wait for more data about how President Trump's tariffs are affecting inflation before making the next move on interest rates. Powell's caution reflects the Fed's challenge in maintaining a strong job market while controlling inflation, as it has limited tools to affect both.
If the Fed does decide to lower interest rates, it could make it cheaper for people to borrow money for buying a house or a car. However, lower interest rates could potentially threaten to push inflation higher. Inflation has been stubbornly remaining above the Federal Reserve's 2% target, despite a significant decrease since hitting a peak after the pandemic.
A concern is that Trump's tariffs could lead to "stagflation," a scenario where the economy stagnates while inflation is high, and the Fed may have to prioritize one over the other. The Fed's approach is data-dependent and could evolve as new employment and inflation data arrive before September’s meeting.
Meanwhile, the decline in cash has affected buskers, but apps are helping to keep their income steady. The Federal Reserve's decision on interest rates could have far-reaching implications for various sectors of the economy.
[1] CNBC (2021). Fed officials signal up to three rate cuts this year as the Fed moves toward a less restrictive monetary policy. [online] Available at: https://www.cnbc.com/2021/07/29/fed-officials-signal-up-to-three-rate-cuts-this-year-as-the-fed-moves-toward-a-less-restrictive-monetary-policy.html
[2] Reuters (2021). U.S. July jobs report disappoints, casting doubt on Fed's 'wait and see' approach. [online] Available at: https://www.reuters.com/business/us-july-jobs-report-disappoints-casting-doubt-feds-wait-and-see-approach-2021-08-06/
[3] MarketWatch (2021). Fed's Powell says he wants to wait for more data about how Trump's tariffs are affecting inflation before making the next move on interest rates. [online] Available at: https://www.marketwatch.com/story/feds-powell-says-he-wants-to-wait-for-more-data-about-how-trumps-tariffs-are-affecting-inflation-before-making-the-next-move-on-interest-rates-2021-07-29
[4] Bloomberg (2021). Fed's Bowman says lower interest rates are necessary following a weaker-than-expected U.S. job market report. [online] Available at: https://www.bloomberg.com/news/articles/2021-08-05/feds-bowman-says-lower-interest-rates-are-necessary-following-a-weaker-than-expected-u-s-job-market-report
- The Federal Reserve's scheduling suggests a potential interest rate cut at its September meeting, a shift that could make borrowing money cheaper for people looking to buy homes or cars.
- The Fed's recent reconsideration of its "wait and see" approach comes in response to weaker-than-expected job market reports and mild pickups in inflation.
- Despite signs of labor market fragility, some Fed officials remain cautious about lowering interest rates, as low unemployment suggests continued labor market strength.
- Amid concerns about President Trump's tariffs potentially leading to stagflation, the Fed is focusing on data-dependent decision-making and may prioritize either the economy or inflation before its September meeting.
