Weakening US jobs market bolsters dissenting Fed officials' position

Reuters

2 days ago

Aug 1 (Reuters) - Two Federal Reserve governors who favored an interest rate cut at the U.S. central bank's policy meeting this week said on Friday they did so largely due to rising concerns about the job market, in statements made public right before the release of hiring data that bolstered their position.
But even with the unexpectedly weak employment data for July, other Fed officials took a more cautious view about the labor market, arguing the central bank did the right thing by holding rates steady this week and noting that it will take time to see if job growth is indeed stalling.
"With economic growth slowing this year and signs of a less dynamic labor market, I saw it as appropriate to begin gradually moving our moderately restrictive policy stance toward a neutral setting," Fed Vice Chair for Supervision Michelle Bowman said in a statement. "This action would have proactively hedged against a further weakening in the economy and the risk of damage to the labor market," she said.
Fed Governor Christopher Waller said in a separate statement that "with underlying inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate." Waller said the job market is nearing stall speed and the central bank's policy rate should be closer to the neutral level where economic activity is neither stimulated nor restrained.
Waller said of the Fed's broader approach to monetary policy right now that "I believe that the wait-and-see approach is overly cautious, and, in my opinion, does not properly balance the risks to the outlook and could lead to policy falling behind the curve."
New employment data on Friday appeared to justify some of that anxiety. The Labor Department reported that nonfarm payrolls rose by a smaller-than-expected 73,000 jobs last month, with big downward revisions to job growth in May and June. The unemployment rate edged up one-tenth of a percentage point to 4.2% in July. U.S. stock indexes fell sharply and yields on Treasuries jumped.
Meanwhile, the Trump administration ramped up its trade war by imposing a new barrage of steep import tax increases on many U.S. trading partners. The latest tariff-related announcement helped send global stock markets lower. Traders and investors also were pricing in Fed rate cuts, with the first projected to come next month.
"We maintain our view that the Fed will ease monetary policy starting in September and see a total of 75 basis points of rates cuts by year-end due to a weakening in employment and the overall economy," said Kathy Bostjancic, chief economist at Nationwide. "The inflation impact from tariffs in our view will be a one-time adjustment that over time will fade."
Bowman and Waller weighed in on Friday after casting dissenting votes against the Federal Open Market Committee's decision on Wednesday to hold its benchmark interest rate in the 4.25%-4.50% range. The dissents marked the first time since late 1993 that two Fed governors had opposed the central bank's consensus view.
Ahead of this week's Fed meeting, Waller had pushed hard for lowering rates, arguing that tariff-related inflation increases are likely to be a one-time shift the Fed could ignore. Bowman also expressed skepticism that tariffs would cause sustained inflation problems.
Cleveland Fed President Beth Hammack, however, was not ready to say that the job market was coming off the rails.
While acknowledging the headline July payrolls number was "disappointing," she told Bloomberg Television that "I feel confident with the decision that we made earlier this week," noting that "when I step back and look at where we are, I see a labor market that is largely in balance."
She said she'll be keeping a close eye on employment data while flagging the fact that inflation is still above the Fed's 2% target. She added that the central bank will have a tricky time balancing its job and inflation mandates.
Hammack declined to say what she thinks the Fed should do at its September 16-17 policy meeting.
In an interview with CNBC, Atlanta Fed President Raphael Bostic agreed the central bank did the right thing holding rates steady this week, even in the face of what he knows now about the July employment data. He said the report was "significant" and particularly notable for its downward revisions to prior months' hiring, and because of that, he's going to more closely weigh job risks relative to ongoing inflation concerns.
Bostic, however, noted that "the labor market still looks good" in terms of wage growth and firms' ongoing efforts to hold onto workers. He said he still has a single rate cut penciled in for 2025, but will watch upcoming data to determine whether that outlook should change.
He also pushed back against the view that tariffs are a one-time inflation shock, saying the way that the U.S. import tax increases have been dribbled out suggests inflation risks could be more persistent.
The governors' dissents had garnered interest in part because of the broader political currents buffeting the Fed. President Donald Trump has been pushing aggressively for rate cuts, excoriating Fed Chair Jerome Powell for failing to heed the White House's demands for lower borrowing costs.
Trump weighed in again on Friday, saying in post on his Truth Social media platform that Powell is "a stubborn MORON" and that the central bank "must substantially lower interest rates," and if Powell doesn't do it, other central bank officials should take control and force the matter.
Waller, who noted last month that his view was not "political," is widely considered to be in the running to succeed Powell when the Fed chief's term expires next May. Bowman, who was recently elevated to the Fed's bank overseer role by Trump, had previously been on the more hawkish end of the monetary policy spectrum, having dissented last fall in favor of a smaller rate cut than what the Fed delivered.
As for the rest of the Fed's policymakers, they voted on Wednesday in favor of holding rates steady because even as some risks to the outlook are emerging, they are still wary of what Trump's tariffs will do to price pressures.
"The economy is in a solid position" and "for the time being, we're well positioned to learn more about the likely course of the economy and the evolving balance of risks before adjusting our policy stance," Powell said at a press conference after the end of the Fed's two-day policy meeting this week.
Powell appeared to see no downsides to the dissents, saying "what you want from everybody, and also from a dissenter, is a clear explanation of what your thinking is and what are the arguments you're making ... We had that today."
Powell did not indicate whether the dissenters had moved the consensus. "We haven't made any decisions about September. We'll be monitoring all the incoming data and asking ourselves whether the federal funds rate is in the right place."