The Fed’s Half Percentage Point Rate Cut Could Mean Worry

The focus for weeks on the Federal Reserve’s rate cut today has been on how large it would be. A quarter of a percent? Half a percent? Now we know it’s the latter. The question is what that means for the economy and expectations of the near future.

During the central bank’s annual retreat in Jackson Hole, Wyoming in late August, Chair Jerome Powell made two things clear in his remarks. One was that the “time has come for policy to adjust.” In other words, a first rate cut would start in September. The amount wasn’t clear.

His other point: "It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon," Powell said. "We do not seek or welcome further cooling in labor market conditions."

The formulation was due to the Fed’s dual mandate of maintaining price stability and also full employment. Inflation has already been on a path down toward the central bank’s 2% target. The last year-over-year inflation figure from the Consumer Price Index was 2.5%.

The labor market, though, has given concerns to many. The Bureau of Labor Statistics revised job market reports from April 2023 to March 2024 by a total of 818,000 downward. Previous such annual revisions typically reset the original numbers by 0.1%. This time the correction was 0.5% — five times as large. There were some categories, such as utilities as well as transportation and warehousing, that saw upward revisions. Nowhere near enough, though, to overcome plummets in manufacturing, professional and business services, and leisure and hospitality.

MORE FOR YOU
Fed Cuts Interest Rates For First Time In 4 Years: Here’s What It Means For You
iOS 18: Apple Just Gave iPhone Users 33 Reasons To Update Now
Samsung’s New Update Surprises Galaxy Users—This Changes Everything

Then came the August jobs report, released in early September. The number of new jobs, 142,000, was 11.8% lower than the median economists’ forecasts of 161,000 collected by Dow Jones. July had an even larger miss, with 117,000 jobs rather than the expected 185,000. With those numbers were several months of manufacturing contraction and weakening wage growth.

In one aspect, all this was good news for rate cuts, especially among those who have believed economic theories that unemployment has to rise to tamp down wage growth pressure on inflation.

Then there’s the other hand. Weakening labor markets also mean that companies don’t need as much help because the businesses are looking ahead with the assumption that there will be a slowdown, so why hire now?

As consulting economist Claudia Sahm — who had in the past worked at the Fed and White House and had advised Congress — wrote about the coming rate cut, “The disappointing labor market data since the July FOMC meeting should add another 25 basis points [0.25 percentage points] to the cut” on top of a similar amount for the falling inflation rate.

There’s also the question of economic growth. First, look at a graph of straight-ahead GDP per quarter growth based on data from the U.S. Bureau of Economic Analysis and made available by the Federal Reserve Bank of St. Louis.

Seems fine, right? Now look at a graph, by quarter, of year-over-year GDP growth.

A different picture entirely. From the 1940s up to the late 1970s, there was a throughline of increasing growth. The 1980s saw the trend tip over toward a long decline up to the Covid-19 pandemic crash, then an upward spike because there was big growth over the global slowdown. But now, year-over-year growth was sliding.

Whether slowing growth brought worry about a recession or concern about the labor market being a bad sign, the assumptions of a happy time with a “soft landing” for the economy should look at what the Fed is doing and reconsider.

Or, as Oxford Economics wrote after the announcement, “The Fed doesn’t like to admit policy errors,” but it probably started cutting late and is trying to keep a soft landing in sight.