What can the Federal Reserve do about rising unemployment?
What can the Federal Reserve do about rising unemployment?
The July consumer price index released Wednesday was mostly good news. The question then becomes whether inflation has fallen enough for the Federal Reserve to cut interest rates, which it had raised to curb price increases.
Because remember, the folks at the Fed have a dual mandate: They have to worry about inflation and the jobs market. And while they’ve been trying to keep down inflation, the jobs market has been getting cooler and cooler.
The Fed technically has a few tools in its toolkit. But we’re mostly talking about one big one: interest rates.
“I’m looking at the rates. I’m looking at what they plan to do with the rates, and what they’re saying about the rates,” said senior economist Elizabeth Renter with NerdWallet.
The Fed raised them throughout 2022 and the first half of 2023. They haven’t changed since July of last year. “After this full year of high rates, we saw unemployment did tick up. We’ve seen hiring slow down,” Renter said.
And since the Fed has this dual mandate to watch inflation and the labor market, Renter said she expects the Fed will finally cut interest rates next month.
But not everyone thinks that’s a great idea.
“If they start focusing purely on the job market, then they essentially will be pinned into cutting rates. The problem is, historically speaking, the job market is not that bad, per se,” said Mark Rossano, the founder and CEO of C6 Capital Holdings. Because even though unemployment is on the rise, it’s still relatively low.
Rossano said he’s worried a rate cut could trigger a second wave of inflation.
“If you were to ask me, ‘Should they do it?’ the answer is absolutely not. I think they are going to be forced to do it, to show that they’re taking advantage of the fact that the labor market has slowed a bit, that the inflation is coming closer to their target,” he said.
Thing is, it could take awhile for a rate cut to impact the labor market.
“We would expect the impact of rate cuts to start manifesting itself at some point in the middle or latter part of next year,” said Andrzej Skiba with RBC Global Asset Management. He said a softening labor market is more of a gradual process.
“And it will take quite a few cuts before that dynamic could be changed in a meaningful way,” he added.
Plus, we don’t know how much a possible first cut would be in September. But it would likely be a quarter or a half a percent.
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