Economists Worry the Fed Has Waited Too Long to Cut Rates

After a worse-than-expected jobs report, many economists are anxious the Federal Reserve could have waited too long to chop rates of interest.

Just two days after the Fed announced its decision to maintain rates regular for now, the U.S. Department of Labor released a disappointing July jobs report showing the unemployment rate has ticked as much as 4.3%. The economy added only 114,000 jobs, far below estimates of about 175,000 for the month.

“Before I knew the roles numbers, I believed they need to cut,” Sofia Baig, economist at Morning Seek the advice of, tells Money. “Now, after seeing the roles numbers, I’m certain they need to have cut.”

The sudden shift within the labor market signals that the general economy may very well be on a path toward a recession, though it’s removed from a guarantee. The Fed said Wednesday that it would love to see more progress toward its goal of two% before cutting rates of interest, but the information has experts calling that call into query.

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Did the Fed miss its likelihood?

Rates of interest are the central banking system’s core tool to combat inflation. Higher rates of interest can cool an overheated economy by making it costlier to borrow money. When it’s costlier to borrow money, people spend less. Consequently, employers eventually hire less — and even cut their workforce.

A Fed rate cut, however, might help stimulate the economy by making it easier for people to borrow money and, in turn, ward off a recession.

Since climbing rates 11 times since March 2022, headline inflation has cooled substantially, falling from its 9.1% peak in June 2022 to three% in June 2024. But now it seems that the war on inflation is taking a toll on the labor market.

Baig is removed from alone in considering the Fed is behind the curve. Before the July jobs report, it was an open debate about whether the Fed had waited too long to chop rates. Following the report, analysts and economists across the spectrum were in agreement: The Fed must have acted last week.

In a note, Elyse Ausenbaugh, head of investment strategy at J.P. Morgan, said the Fed had been “barely more hawkish than expected,” adding that “the market response to the most recent jobs data reflects concerns that the Fed has quickly fallen behind the curve.”

As of Monday morning, markets were down across the board. The Dow Jones Industrial Average slid 2.7%, Nasdaq fell 3.6%, and the S&P 500 was down 3.1%.

“Slowing job growth makes clear that the Fed has waited too long to chop rates of interest,” a note from analysts on the left-leaning Economic Policy Institute stated.

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What the Fed knew that we didn’t

While the July jobs report surprised many economic experts, it could have not been a surprise for the Fed itself. The central bank’s latest meeting happened to fall two days before the discharge of the Labor Department’s monthly jobs report, which will not be often the case.

Before the general public release of every jobs report, the Federal Reserve gets preliminary employment data and estimations of hours worked from the Labor Department two days prematurely, the department confirmed to Money. It receives a full report at noon the day before the discharge.

Meaning, on account of a scheduling quirk, the Fed’s board of governors had a glimpse of a minimum of some jobs numbers before announcing its decision to carry rates regular Wednesday afternoon.

Still, that doesn’t come as much consolation to Baig with Morning Seek the advice of. She says it’s possible that the Fed is being more hawkish than anticipated due to the pressure to not repeat past mistakes.

She’s referring to the ‘70s and ‘80s when the U.S. last handled soaring inflation. The Fed raised rates of interest after which quickly lowered them at the primary signs price increases were easing. Then, inflation got here back with a vengeance, spiking to a peak of 13.5%.

“I believe that’s really weighing on them, perhaps even greater than I suspected,” Baig says.

Will there be an emergency Fed rate cut?

The Fed had signaled its plan to slash rates in September even before the no-good jobs report Friday.

At a news conference announcing the Fed’s decision, Chair Jerome Powell said that an rate of interest cut is coming “as soon as the subsequent meeting” if inflation continues cooling. The central bankers next meet in about six weeks, Sept. 17-18.

Analysts were nearly unanimous in expecting a rate cut in September. The roles report all but confirms it. Now, markets are pricing in a deeper rate cut. Based on CME FedWatch, a tool that gauges the likelihood of a rate cut, investors overwhelmingly expect a 0.5 percentage-point rate cut, versus the usual 0.25-point cut.

Some, nevertheless, are pushing for cuts before the September meeting, citing sliding stock prices.

“It will be beyond negligent for the Federal Reserve to not announce an emergency rate of interest cut in response to the worldwide rout in stock markets,” Nigel Green, CEO of deVere Group, said in a statement urging the Fed to make a 0.25-point cut immediately.

Emergency rate cuts are possible, though unusual. The last time the Fed made such a move was at the start of the pandemic, lowering borrowing costs by a half a percentage point.

Nevertheless, Baig doesn’t see that taking place immediately, arguing that an emergency cut may very well be harmful on account of the optics.

“Loads of what the Fed does is predicated on vibes,” she says. “Them getting together and meeting last minute could instill panic that’s not needed.”

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