U.S. unemployment rises as Fed holds key interest rates steady • Maine Morning Star

The unemployment rate climbed to 4.3% in July, up 0.2% from June, according to the Bureau of Labor Statistics' jobs report released Friday, alarming some economists who say the Federal Reserve waited too long to cut interest rates.

The economy added 114,000 jobs, and the number of people furloughed increased by 249,000. The economy continued to add jobs in health care, social assistance and construction. Public sector job creation has slowed in recent months and was little changed in July, with employment in those sectors increasing by 17,000, according to the Bureau of Labor Statistics.

“We’ve seen some slowdown in the labor market for several months, although it’s relatively solid by historical standards,” said Elise Gould, senior economist at the Economic Policy Institute, a center-left economic think tank. “There haven’t been inflationary pressures coming from the labor market because wage growth continues to slow.”

Gould added that she thinks the Fed waited too long to cut interest rates, given what the labor market data shows.

Softening is a little more concerning and we may get there sooner than necessary, she said.

The Fed decided not to cut rates at its latest meeting, it announced Wednesday. Fed Chairman Jerome Powell said the central bank still needs to see more data showing that inflation is falling enough to justify a rate cut. Despite recent increases in the unemployment rate, Powell said the labor market is normalizing after a warmer employment market. But he indicated it was possible the Fed could be ready to cut rates by September.

“We had a good quarter of inflation and we saw the labour market move quite markedly. As I mentioned, I don't think it needs to calm down any further for us to get the labour market inflation results. That could happen in September if the data confirms that,” he said.

Powell added that he saw no evidence in the economic data that the economy was weakening significantly.

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The Fed began raising interest rates in March 2022 to combat inflation but stopped doing so last fall. The Fed has said it remains focused on getting inflation back to its 2% target, but it also needs to fulfill its dual mandate, which includes full employment. The Fed has used higher interest rates as a tool to cool the economy when it believes it is warming too quickly, but it is often a controversial tool because of the risks it poses to the labor market. In June, the Fed’s most popular measure of inflation, the personal consumption expenditures price index, rose 0.1% and has risen 2.5% over the past 12 months.

Economists say the economy is healthy, but that could change quickly. Many have advised the Fed to remain cautious about that risk by cutting rates quickly and sharply. While inflation has hurt families, high interest rates have also hurt the housing market, where homeownership remains out of reach for many and rents have risen due to increased demand in the rental market. Rising interest rates have also been a source of frustration for families because they have increased the cost of borrowing, economists told States Newsroom.

The consequence of extremely high interest rates for a very long period of time is that the labor market starts to crack. That’s what high interest rates are supposed to do, said Dr. Rakeen Mabud, chief economist at the progressive think tank Groundwork Collaborative. “No one knows exactly when that crack will open up and turn into a giant chasm, and I hope we don’t get to that point. But I think the longer the Fed keeps rates high, the more they’re playing with people’s lives.”

Mabud added that she doesn't see how the root causes of inflation will be addressed by the Fed keeping rates where they are, as she attributes them to factors outside the Fed's control, including supply chain issues, a shift in demand due to the pandemic and companies that have used their market power and inflation to drive up prices.

Economists have been paying particular attention to the unemployment rate because the Sahm rule, a measure of whether the country is entering a recession, was triggered by the current unemployment rate. The Sahm rule applies when the unemployment rate increases by certain percentage points compared with previous employment data. July’s unemployment rate entered the territory that economists say triggers the rule. Still, there may be reasons not to panic just yet.

Gould said that in the case of this report, it is essential to understand that the unemployment rate can increase because people who were not counted as part of the labor force, because they were not actively looking for work, return to it and are included in the group of unemployed people.

People are optimistic about their job prospects. They are returning to the job market or entering it for the first time to try to find a job. Many of them didn't find a job in July, but they are satisfied, Gould said.

Jesse Rothstein, a professor of public policy and economics at the University of California, Berkeley, said it may be time for the Fed to adjust its policy and put its foot back on the economic accelerator.

“This is a type of easing that we have never seen before,” he said. “It’s not as rapid as when we go into a recession, despite the Sahm rule being triggered. We’ve been aiming for a soft landing and I think the Fed has done a very good job of that so far, but a soft landing requires frequent small adjustments.”

The labor market showed encouraging signs in the fight against inflation. Wages rose 3.6% from a year ago. That's the weakest economists have seen in two years, Gould said, suggesting there aren't any inflationary pressures on wages that the Fed should be concerned about in this report. The news for workers isn't all bad, either.

“We can be happy about the slowdown in nominal wage growth because inflation has come down faster and real wages have continued to rise. If you look at the standard of living of workers, even though we are seeing a slowdown, the standard of living has been rising and has been for over a year on average because inflation has come down much faster,” she said.

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