Fed pressured to cut rates as unemployment hits highest level in nearly three years

A lackluster jobs report that featured unemployment shooting to its highest rate since October 2021 is intensifying calls for the Federal Reserve to begin cutting interest rates.

The economy added 114,000 jobs in July, far fewer than expected, and the unemployment rate rose two-tenths of a percentage point to 4.3%, the Bureau of Labor Statistics reported Friday.

For the past year, the Fed has held its interest rate target at the highest level in a generation in order to stifle inflation by depressing demand. Until now, the labor market has proved resilient. The latest report set off alarm bells, though, with some saying the Fed has waited too long to ease monetary policy and is now risking a recession. Liberal Sen. Elizabeth Warren (D-MA) quickly called for Fed Chairman Jerome Powell to convene an emergency meeting to cut rates rather than wait for the Fed's next scheduled meeting in September.

“Fed Chair Powell made a serious mistake not cutting interest rates,” she said on social media. “He’s been warned over and over again that waiting too long risks driving the economy into a ditch. The jobs data is flashing red. Powell needs to cancel his summer vacation and cut rates now — not wait 6 weeks.”

The Fed rarely changes its rate target outside of a scheduled meeting, and only in emergency circumstances.

But Mark Hamrick, a senior economic analyst at Bankrate, said Warren’s idea would make things worse because it would give the perception that the Fed is panicking and generate more concern.

“Elizabeth Warren is out of her lane in making that kind of a call, but she has other motivations for doing that,” he told the Washington Examiner. “She's not a central banker. Politicians will say what politicians are going to say.”

Republicans used the weak jobs report to attack President Joe Biden and Vice President Kamala Harris, who is now the presumptive Democratic nominee, for the administration’s economic policies.

“Stagnant job growth and rising unemployment — these are the consequences of the Biden-Harris Administration’s economic policies,” Rep. Kevin Hern (R-OK) said after the news broke. “The harsh reality is that the Biden-Harris economy is failing American workers every day. Their policies just aren’t working — we need a new direction for our economy.”

Ahead of the report, most investors were pricing in that the first 0.25-percentage-point rate cut would come in September. After the new jobs data were released, many now expect the Fed to cut even more aggressively, by a half of a percentage point.

Investors are now nearly certain that the Fed will cut rates in September. Investors put the odds of a half-percentage-point hike in September at over 70%, according to the CME Group’s FedWatch tool , which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.

Charlie Ripley, a senior investment strategist for Allianz Investment Management, highlighted the lower-than-anticipated jobs growth for July in a note on Friday morning. He said it is flashing a “warning signal” that the economy can turn south rather quickly.

“When combined with an unemployment rate rising to 4.3%, declining manufacturing jobs, and a weakening wage picture, the backdrop is no longer looking that great,” Ripley said. “Ultimately, today’s employment data should embolden the committee to cut policy by more than 25 basis points at the next meeting.”

Hamrick said the July jobs numbers are in line with evidence that there is a “material weakening in the job market,” which Powell has said he does not want to see.

“This would seem to be the dictionary definition of that,” Hamrick said, although he pointed out that this is only one month of such data. The unemployment rate has notably ticked up by nearly a whole percentage point since April 2023, he said.

Investors on Wall Street were in a bit of a panic on Friday, with the Dow Jones Industrial Average plunging more than 860 points in a sell-off that began right when the stock market opened and accelerated throughout the day. The tech-heavy Nasdaq lost nearly 3% of its entire value in the hours after the report was released.

The fear of a slowing labor market and economy was also seen through the Chicago Board Options Exchange Volatility Index, better known as VIX but also as the “fear index.” The VIX was up some 40% on Thursday, the highest level since the collapse of Silicon Valley Bank and the subsequent fallout.

Recession bells were also ringing on Friday.

The report triggered a major recession indicator — when the three-month moving average of the unemployment rate rises half a percentage point relative to its minimum point over the past year. This indicator, known as the Sahm Rule, signaled the start of all post-war recessions.

Still, Claudia Sahm, who invented the rule and is now chief economist at New Century Advisors, pushed back on those fears a bit. Ahead of the new data, she said a recession “is not imminent,’’ even if the Sahm Rule were to be triggered, because of the unusual circumstance that large numbers of immigrants are entering the job market and being counted among the unemployed.

CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER

Still, any talk of a recession in an election year will aid Republicans. House Ways and Means Committee Chairman Jason Smith (R-MO) noted the indicator in a statement Friday.

“With a majority of industries losing jobs and indications we have fallen into a recession, this jobs report is one of the worst we have ever seen from the Biden-Harris Administration,” he said.