The latest inflation data was broadly in line with expectations, showing price growth continuing to slow on an annual basis as investors debate when and how much the Federal Reserve should cut interest rates.
While inflation was the reason the Fed began raising interest rates, the central bank’s other mandate — maximum employment — is now coming to the forefront in the debate over cutting interest rates.
“these [job] “The jobs report is where we’re really going to see action over the next few months,” Nathan Sheets, global economist at Citi, told Yahoo Finance. “It’s definitely what the Fed will be watching most closely.”
With inflation currently running below the Fed’s 2% target on a three-month basis, economists argue that the more worrying trend in the economic data is in the labor market, where the unemployment rate has been steadily rising and monthly job gains have been declining.
“We’re at such a tipping point right now,” Nicholas Brooks, head of economic and investment research at ICG, told Yahoo Finance. “For the last six months and since, the focus has been on inflation and its decline, but now the headlines are [inflation] Number and Core [inflation] The numbers are coming down again and are back to levels that the Fed is more comfortable with, and I think the focus is now shifting to the growth data.”
Attention shifted to the labor market slowdown after a weak July jobs report showed the second-weakest monthly job gains since 2020 and the highest unemployment rate in nearly three years. The report also triggered a commonly watched recession indicator: Historically, the recent increase in the unemployment rate has typically been a sign of a rise as labor market trends worsen.
Mark Zandi, chief economist at Moody’s, told Yahoo Finance that while the focus on inflation won’t go away, labor market risks are growing more than inflation risks.
“This trend suggests that unemployment will rise further and inflation will fall further,” Zandi said.
Zandi argued that if the trend continues, further deterioration in the labor market is more likely to lead the Fed to ease monetary policy further than lower inflation would lead to interest rate cuts.
While the labor market is clearly cooling, economists are taking solace in current trends that suggest the unemployment rate is rising mainly because fewer workers are being hired and more are joining the workforce, not because companies are conducting mass layoffs.
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This has increased pressure on redundancy data, which Zandi said would be a “key statistic.”
“Businesses are already cutting back on hiring, slowing job creation,” Zandi explained. “But the good news is that we’re not seeing a massive increase in layoffs right now. But if that were to happen, that would change things. The risk of a recession would be much higher than I currently expect.”
Zandi sees about a 33 percent chance of a recession within the next 12 months, and said weekly jobless claims will be an important release to watch when tracking layoffs.
New claims for unemployment benefits fell more than expected last week, providing some relief to markets worried about signs of further deterioration in the U.S. labor market.
The next weekly number of jobless claims is due to be released on Thursday morning. Economists expect claims to come in at 235,000, up slightly from 233,000 a week ago.
Federal Reserve Chairman Jerome Powell speaks during a press conference following the Federal Open Market Committee meeting in Washington, DC on July 31, 2024. (Andrew Harnick/Getty Images) (Andrew Harnick via Getty Images)
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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