Focus turns to interest rates after worrying signs from labour market

The data cast doubts on Fed chairman Jerome Powell’s assertion directly after the latest policy meeting that the labour market appeared to be normalising gradually. File picture: Susan Walsh/AP

The global plunge in stocks on Monday puts a renewed focus in interest rates especially in the US.

The Federal Reserve kept its benchmark interest rate unchanged in the current 5.25%-5.50% range last week and signalled it was on course to begin cutting rates in September.

However, that decision has been followed by worrying signs that the labour market might already have turned.

The number of Americans filing new applications for unemployment benefits increased to an 11-month high, while job gains markedly slowed in July and the unemployment rate rose to 4.3%.

The data cast doubts on Fed chairman Jerome Powell’s assertion directly after the latest policy meeting that the labour market appeared to be normalising gradually, which would allow the central bank to take a bit more time before cutting rates to ensure inflation was fully quelled.

Instead, economists, and traders honed in on Powell’s other comments that the Fed would respond if there was an unexpected deterioration in the labour market.

Asked about the possibility of an inter-meeting rate cut, Chicago Federal Reserve president Austan Goolsbee said that “everything is always on the table” — from rate increases to cuts as the Fed maintains its focus on employment, inflation, and financial stability.

“If the conditions collectively start coming in on the through line that there’s deterioration on any of those parts, we’re going to fix it,” Mr Goolsbee said.

Investors in contracts tied to the Fed’s policy rate are now pricing in an inter-meeting cut before the next policy meeting on September 17-18, and maintained bets the policy rate will end 2024 in the 4.00%-4.25% range.

“The Fed’s response will be determined by two factors: The extent to which downside risks to the real economy materialise, and whether the sharp sell-off in financial markets causes something to break,” said the group chief economist at Capital Economics, Neil Shearing.

Mr Powell, who has come under a renewed political lens ahead of the US presidential election in November, was given short thrift by Democratic US senator Elizabeth Warren.

“He’s been warned over and over again that waiting too long risks driving the economy into a ditch,” Ms Warren said in a post on X following the jobs report on Friday.

“Powell needs to cancel his summer vacation and cut rates now — not wait six weeks.”

• Reuters