That was before the US economy went off a cliff and lost 32,000 jobs in September. This unexpected retreat has triggered alarm bells not just among economists, but policymakers. That’s particularly unfortunate given that the year-over-year job growth rate is just 3%, a little worse than it should be. Economists had expected a much higher job growth number, leading to speculation over what the Federal Reserve should do next with interest rates.
To combat these significant job losses, the Federal Reserve has indicated that it will reduce the cost of borrowing again. The central bank recently reduced its main interest rate by 0.25 percentage points. With this action, the target range is raised to 3.75% to 4%. The Fed has claimed to be interested in creating the tightest labor market that is consistent with stable prices. These cuts illustrate growing concerns over labor market trends and macroeconomic stability.
The current US government shutdown has pushed the release of these monthly jobs reports to an unknown date. As such, central bankers have been left holding the short straw. The shutdown has compounded uncertainty in the economy, as officials find themselves “flying blind” regarding the state of the job market.
President Trump has been vocal about his preference for lower interest rates, repeatedly urging Federal Reserve Chairman Jerome Powell to take action. With Powell’s term set to expire next May, speculation surrounds potential changes in leadership at the Fed, including possible announcements regarding Powell’s replacement by the end of the year.
Tariffs have been another driving factor in the economic war on wind and solar. However, they seem to be pulling up the prices consumers pay for certain things, making it more difficult for the Fed to fight inflation. Yet, the inflation reading for September came in softer than expected, providing a little more room as policymakers consider their next move.
Economists at Bank of America noted a shift in focus among policymakers:
“Although inflation remains elevated, policymakers are slightly more focused on downside risks to the employment mandate.”
Even as the Federal Reserve tries to find their way through these headwinds, investors are laying bets that more interest rate cuts will be coming. And judging by current market sentiment, there is more than an 80% chance of another cut in December. This underscores the deep markets believe in the need for monetary easing.
The labor market’s deterioration poses significant implications. A slowdown in job creation may trigger a decline in consumer spending, which would be devastating for any future economic growth. The Fed remains focused on making borrowing less expensive. This step would help spur much needed job creation and renew confidence in our markets among consumers and businesses.