A long-awaited update on the US labor market finally landed and showed that the economy added far fewer new jobs than many experts expected. How is that possible? With the Federal Reserve planning to cut interest rates soon in a bid to reenergize the economy, it’s perplexing that the economy doesn’t seem strong enough to handle it without inflation going out of control again.
Bureau of Labor Statistics
A recent report from the Bureau of Labor Statistics found that the labor market added 142,000 jobs in August, outside of farming positions. Experts were calling for 165,000 new jobs, and the shortfall caused something of a stir for economists. Somehow, the employment rate even fell from 4.3% for July to 4.2%. That might not sound like a steep drop, but it’s not what the experts want to see.
Wage Growth
Thankfully, wages seem to be growing. In August, the US saw wages jump 3.8% year-over-year, a very important metric for workers looking to deal with ever-rising inflation. Still, economists say this could be a bad thing, as rising wages is another critical element in inflation.
Cooling Economy
Fed chair Jerome Powell says that the central bank has seen “unmistakable” signs of the economy cooling off in the face of historically high borrowing costs. These measures were necessary to prevent inflation from going out of control, but now the economy teeters on another extreme. If borrowing costs stay too high for too long, it can trigger a recession.
Threading the Needle
The job for the Fed is extremely tricky. The central bank has to carefully thread the needle and slide between the dual pressures of inflation and the labor market while trying to make investors and the average worker happy all at once. That’s not an enviable position.
Cutting Rates
Recent job market data will weigh heavily on the central bank’s decision-making process as it prepares to cut interest rates. If the Fed is too stingy with their borrowing cost cuts, the economy could just careen over the edge into recession anyway. If they’re too generous, inflation could come roaring back even worse than it was at the height of the pandemic.
Job Market Strength
Still, the job market is comparatively strong according to some experts. Things could be much worse than they are, despite missed goals and general worker unease. This could lead the Fed to very carefully weigh its options and just cut interest rates by 25 basis points.
Long 2024 to Go
The Fed is expected to cut interest rates several times throughout 2024. Some of these could be aimed at the higher end, slashing as much as 50 basis points off the borrowing costs. Some experts are even anticipating the central bank to cut interest rates by as much as a whole percentage point before the start of 2025.
Stock Market Remains Uncertain
The stock market has been, broadly, uncertain recently. The continued mixed data from labor reports and the GDP makes it hard for investors to accurately predict what the central bank will do. This leaves room for some wild weekly swings in the stock market.
Read More: Are Interest Rate Cuts Good for the Economy?
Inflation is Biggest Question
Getting inflation under control is the biggest concern for the Fed at the moment. If they can see the annual inflation number get to (or, preferably, under) their target rate of 2% annually, the case for a hefty interest rate cut will become much stronger.
Read More: Is Crypto in for a Resurgence as Interest Rates Fall?
No One Knows
Frankly, it’s a weird time to be watching the economy. Lukewarm data and uncertain economists continue to shrug while the average worker feels somewhat stuck in place between inflation and what seem like worsening career prospects. Will things change for the better soon? Right now, no one knows.
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