The Fed "flips over" again? What Powell is worried about has happened!

Federal Reserve officials chose not to cut interest rates this week because policymakers want more data to ensure that inflation is truly under control. While this cautious approach is prudent regarding inflation, Friday's employment report emphasized that this approach may be risky when it comes to the job market.

Data on Friday showed that the unemployment rate unexpectedly rose to 4.3%, higher than the previous 4.1%, as hiring slowed sharply. The U.S. added only 114,000 jobs in July, below the expected 175,000, and employment growth in previous months was also revised downward.

This combination may raise concerns that the Fed has waited too long to cut rates, potentially falling behind the curve, making it difficult to prevent or reverse the slowdown in the job market.

Higher interest rates help curb inflation by slowing demand in the economy. When the cost of borrowing for buying homes or expanding businesses is higher, people reduce their spending, and companies hire fewer workers. With economic activity slowing down, businesses struggle to raise prices quickly, easing inflation.

However, this chain reaction could come at a severe cost to the job market. Once the job market cools down, it is challenging to stop. As economists often say, the unemployment rate rises like a rocket and falls like a feather.

Considering this risk, as well as the fact that inflation has already significantly decreased, Fed policymakers are increasingly aware that they may overdo it, leading to a severe economic slowdown and higher unemployment rates.

These concerns were not enough to prompt the Fed to cut rates at this week's meeting. But Powell made it clear that policymakers will carefully watch the upcoming employment data for any signs of deteriorating job conditions. He hinted that they are ready to react if there are unexpected signs of a sudden deterioration in the job market.

Powell said at this week's press conference that a broad set of indicators suggests that the labor market has recovered to pre-pandemic levels. He then added, "I don't want to see further cooling in the labor market."

In light of this, the weak employment data on Friday may further solidify the Fed's plan to cut rates in September, perhaps more cuts later this year. Investors have significantly increased the likelihood of a 50 basis point rate cut at the Fed's September meeting. The Fed will receive another employment report before the end of the meeting on September 18.

Some critics of the Fed have already begun to argue that waiting until the September meeting to cut rates is a mistake.

The rise in the unemployment rate may reinforce these concerns, especially when inflation concerns that may be lingering have disappeared from people's view.

"The adjustment of the federal funds rate takes time to take effect, so many are concerned that if the Fed starts lowering borrowing costs only when there are serious signs of stress in the job market, it may be too late," wrote Neil Dutta, head of Renaissance Macro Research Economics, in a research report after the Fed's meeting this week However, economists often point out that one reason the Federal Reserve is cautious rather than eager to cut interest rates is that it has misjudged the inflation situation twice in the past: when inflation soared in 2021, the Fed's response was slow, leading to widespread criticism; and when price pressures began to ease last year, the Fed was overly optimistic."

Powell said this week, "We are weighing the risks of acting too early and acting too late. This is a very difficult judgment."