Market turmoil gives Fed ‘license’ to cut rates
A delay in cutting rates will spark more criticism from progressives, who say the Fed needs to ease borrowing costs soon if it wants to save the labor market.
Growing anxiety about a weakening economy is fueling pressure on Federal Reserve Chair Jerome Powell to move quickly to calm market jitters.
But he’s showing no sign of alarm.
The central bank chief has been under fire since Friday’s jobs report showed an unexpected jump in the unemployment rate — the kind of number that would’ve led Fed policymakers to cut borrowing costs at their meeting last week if it had come only a few days earlier. Still, they’re giving no indication that immediate action is necessary to avoid a recession, with unemployment still at only 4.3 percent and inflation looking close to being tamed.
“The concern is we won’t just land at this relatively good and balanced place, but that we’ll continue to deteriorate and softening [in the job market] will turn into weakness,” San Francisco Fed President Mary Daly said at an event in Hawaii on Monday. “We don’t see that right now.”
Yet any further delay in easing rates will spark more criticism from progressives like Sen. Elizabeth Warren (D-Mass.) and key allies of Vice President Kamala Harris, who have warned for months that the Fed needs to cut borrowing costs soon if it wants to save the labor market. Fearful of a possible recession just as the presidential campaign is heating up, they are frustrated at the Fed chief for waiting so long to lower rates even amid indications that inflation is already close to the Fed’s target.
“Powell needs to cancel his summer vacation and cut rates now — not wait 6 weeks,” Warren posted on X after the release of the July jobs numbers.
Stocks plunged on Monday in the U.S. and overseas following the release of the report but rallied on Tuesday. The market turmoil may help clear away some of the GOP opposition to the Fed’s reducing rates next month, just weeks ahead of the election.
Before the employment report, former President Donald Trump and other GOP lawmakers were warning Powell that any move to lower rates before the vote would smack of political interference. Now, there are signs that some Republicans are easing off.
“Would they have more of a license to do it, apart from seeming political? I would think so,” Sen. Kevin Cramer (R-N.D.), one of the lawmakers who previously warned about a pre-election rate cut, said in an interview. “If they needed an excuse, they probably have one. But I still don’t see it as the silver bullet that I think a lot of people expect.”
For his part, Powell has rejected the notion that politics will have anything to do with the Fed’s decision as he aims to win the fight against inflation without unnecessarily harming the job market.
He already signaled last week that the Fed’s rate-setting committee expects to cut interest rates at its next meeting in September, and the employment data opened the door to a more aggressive move at that meeting.
Bharat Ramamurti, a former deputy director of the National Economic Council under President Joe Biden, said last week that a half-a-percentage-point cut — double the Fed’s standard move — merited consideration and that the central bank was already “playing catch up.” The jobs report reflected a much softer labor market than anyone had anticipated.
Now, even steeper cuts might be warranted, Ramamurti told POLITICO on Tuesday.
A three-quarters of a percentage point reduction “could be reasonable,” he said, noting that the Fed raised rates by similar increments when it was trying to suppress inflation in 2022. “It should depend on the data between now and September.”
Economically speaking, a half-point cut in September would not be much different from a quarter-point move in July and a second quarter-point move in September. That’s one reason Fed officials likely aren’t overly worried about their decision to stand pat last week.
But the Fed’s reliance on backward-looking labor and inflation data could hinder its ability to prevent future economic pain, said Mohamed El-Erian, chief economic adviser at the European insurance giant Allianz.
El-Arian, who had argued for a quarter-point cut in July, said the central bank “should have more of a forward-looking risk mitigation strategic mindset.”
“Absent that, the Fed will continue, inadvertently, to be an amplifier of market volatility rather than a stabilizer,” he said in an email. “An overly tight monetary policy approach will increase the probability of a recession that hits the poor particularly hard.”
The softening labor market has made it harder for workers to find new jobs. Turnover and wage growth is slowing. Meanwhile, high borrowing costs have also made it more difficult for consumers to pay off their debts. Over the last year, 9.1 percent of credit card balances and 8 percent of auto loan balances became delinquent, the New York Fed reported on Tuesday. That’s the highest for both since 2011.
Still, Rep. Andy Barr (R-Ky.), who has also warned Powell against cutting rates ahead of the election, downplayed the need for an emergency action by the Fed, despite rising investor worries about the prospect of a recession in the U.S.
“Absent market dislocations, even a significant stock market drop is not likely to call for Fed action on rates, as data dependence does not mean panic reactions,” Barr told POLITICO, adding that inflation is “still above target.”
But he acknowledged that the Fed will get more inflation data before its September decision.
Senior Fed officials are clearly becoming more confident that inflation is on a path back to 2 percent — their preferred inflation gauge rose 2.5 percent over the 12 months ending in June — and they’re now likely to prioritize ensuring that joblessness doesn’t continue to rise.
But they’re also warning against overreacting based on one data point, especially since there are few signs that layoffs are spiking.
“Underneath the hood of the labor market report, there’s a little more room for confidence that we’re slowing but not falling off a cliff,” Daly said.