MNI POLICY: Job Revisions Pressure Fed To Cut In September

The Federal Reserve looks increasingly likely to cut interest rates in September after weaker-than-expected July jobs data and major downward revisions to May and June painted a less sanguine picture of the labor market, despite inflation also starting to pick up from tariffs. 

Still, because most FOMC members expect inflation to head higher over the next few months, policymakers are likely to take cuts one at a time and at a measured pace. 

The worsening jobs outlook raises the bar on the kind of near-term inflation shock from tariffs that would be required to tilt the Fed away from the prospect of a September rate cut, which is now more than fully priced into financial markets. 

“This is concerning,” Fed Governor Lisa Cook said at a panel at the Boston Fed Wednesday. “These revisions are somewhat typical of turning points.”

While Fed Chair Jerome Powell emphasized the unemployment rate as the most crucial jobs indicator for the FOMC to consider, the downward revisions painted a much darker picture of employment conditions in the economy, which are likely to unite previously-divided policymakers around the need for rate reductions. 

"We have to look at the panoply of" employment indicators, said Cook.

SLOW AND STEADY

Still, hopes for a more aggressive 50 basis point cut might be overdone for now, barring yet another major downward surprise in employment. Officials are not yet worried about a downturn in the economy, but rather focused on catching up to a recent slowdown — GDP growth averaged just 1.5% in the first half of the year.

Indeed, because Fed officials are quite unsure as to where the neutral rate of interest ultimately lies, with estimates ranging from 2.5-3.9%, they would prefer to move slowly toward that uncertain destination. 

Nonfarm hiring came in at 73,000 for July, below estimates for 104,000 new jobs added, but large downward revisions to the previous two months took away a total of 258,000 jobs, pulling down the three-month average to just 35,000 and the six-month average to 81,000, the lowest pace of job growth since 2020. 

The three-month average, if excluding Covid, is the worst in 12 years. The revisions resulted from additional responses from businesses and government agencies and the recalculation of seasonal factors, BLS said. The unemployment rate edged up a tenth to 4.248%.

Two Fed governors, Miki Bowman and Chris Waller, dissented in favor of cutting rates a quarter point at the July meeting because they believed worrisome cracks in the labor market warranted preemptive support from the monetary authorities. The Fed has kept rates steady at 4.25-4.5% all year as progress on inflation stalled and policymakers worried tariffs might boost price pressures further.