Fed Rate Cuts Must Come Sooner Rather Than Later
The labor market is rapidly weakening in ways that aren’t well appreciated, raising the risk of a recession if the central bank waits too long to ease monetary policy.
Federal Reserve Chair Jerome Powell may be looking at a recession.
Photographer: Win McNamee/Getty Images
Comments by Federal Reserve Chair Jerome Powell last week that policymakers have turned their focus to when to cut interest rates suggested the central bank is confident that inflation has been tamed. I agree that the Fed should be thinking about lowering rates sooner rather than later, but not for the same reasoning.
Powell should be more worried about tipping the economy into a recession by not lowering rates than he might be with squeezing out the so-called “last mile” of inflation by keeping borrowing costs higher for longer than needed. The reason why is the labor market looks to be deteriorating in ways that are little appreciated. Don’t get me wrong, the current unemployment rate of 3.7% is near historically low levels and the Federal Reserve Bank of Atlanta’s widely-followed GDPNow index that attempts to track the economy in real time puts this quarter’s growth rate at a very solid 2.68%. Nonetheless, just like with so many other parts of the post-pandemic economy, the labor market playbook has changed.