Fed readies rate cut on growing worries about health of economy
The monthly tab on how many new jobs are created in the U.S. is rarely shunted to the undercard, but another headliner is hogging all the attention.
The Federal Reserve is widely expected this week to cut a key interest rate that influences the borrowing costs for businesses and consumers. And the Fed is going to do so even with stock markets hitting fresh record highs and unemployment sitting near a 50-year low — an almost unheard-of combination.
Welcome to the 21st century economy.
The central bank isn’t worried about how the economy is actually doing. The U.S. grew at a moderate 2.1% pace in the second quarter after a 3.1% growth in the first three months of the year.
What the Fed is worried about is an uncertain future: uncertainty tied to festering U.S. trade disputes with China and other nations. These fights have led to tariffs and retaliatory tariffs, disrupted global supply chains and sapped the strength of the global economy.
The Fed’s pending rate cut is being seen by Wall Street as an insurance policy of sorts, or an immunization shot, in case the turbulence gets worse.
A handful of fresh reports this week, including the July employment figures, aren’t expected to show the economy getting any worse. Personal spending rose in June, consumer confidence may have bounced back and manufacturers are still growing, albeit slowly.
Inflation as measured by the Fed’s preferred PCE price gauge will also be subdued.
The July employment report comes out next Friday, two days after the Fed makes its play. The report will still shed valuable light on how the economy is performing.
Economists polled by MarketWatch figure the U.S. created about 170,000 new jobs in July. While that would mark a dropoff from the 224,000 gain in June, it might be enough to nudge the unemployment rate back down to a half-century low of 3.6%.
How come? The U.S. doesn’t need to create as many new jobs to absorb a slower growing population of working-age Americans. Economists figure the U.S. needs to add less than 80,000 new jobs a month to hold the unemployment rate near its remarkably low rate.
“The pace [of hiring] is still more than sufficient to absorb new entrants into the workforce and keep the unemployment rate low,” said NatWest Markets chief U.S. economist Michelle Girard.
What’s arguably more important than the number of new jobs created is the willingness of companies to keep staff at current levels even if demand softens. So long as most Americans are working and spending money, the U.S. economy will do all right even if the rest of the world falls behind.
The Fed hopes to give companies some incentive with a largely symbolic rate cut. Only time will tell if it works.