Economists blame the Fed for mismanaging interest rates (again)

The Federal Reserve can’t seem to get its timing right.

Just two days after the central bank voted to hold interest rates at 5.5%, the U.S. unemployment rate spiked to its highest level since October 2021 as hiring plummeted.

According to the Department of Labor, the unemployment rate rose to 4.3% in July from 4.1% the previous month. Following two months of downward revisions, nonfarm payrolls grew by just 114,000 in July, the weakest pace of hiring since the pandemic.

Now, the Fed finds itself between a rock and a hard place.

“And so the Fed blows it again waiting too long” to move on interest rates, wrote macro analyst Sven Henrich. “Should’ve cut this week as many have suggested. But they didn’t listen when inflation was flying higher and they didn’t listen again now.”

The central bank is now “back to chasing economic developments they keep being blind to and hope for the best,” he said.

Henrich isn’t alone in his damning critique of the Fed.

Queens College President Mohamed El-Erian has been warning the Fed for months that the economy is slowing faster than expected and that rate cuts are needed sooner rather than later.

“I am stunned by how quickly the market narrative has changed about what the Federal Reserve should do,” El-Erian wrote following the Aug. 2 nonfarm payrolls report.

“The widespread comfort of just a few days ago about the Fed having time to wait until September to cut rates by 25 bps is being replaced by more analysts and economists calling for 50 bps,” he wrote.

According to futures markets, the Fed will likely have little choice but to cut interest rates more aggressively in September due to mounting economic pressures.

It’s worse than it looks

The continued rise in unemployment has put the U.S. economy on the precipice of a recession. Economists believe it’s only a matter of time before the country enters a downturn.

By one measure, in fact, the economy is already in a technical recession.

The Sahm Rule predicts that a recession is imminent when the unemployment rate’s three-month average increases by at least 0.5% from its low over the previous 12 months.

July’s unemployment rate has triggered the Sahm Rule.

As economist David Rosenberg noted, the unemployment rate’s three-month average has increased by more than half a percentage point over the past year, which exceeds the minimum threshold identified by the Sahm Rule.

Rosenberg wrote that this is a “100% iron-clad indicator that the downturn has either arrived or [is] about to.” “The Fed is as behind the economic curve now as it was behind the inflation curve back in 2021-2022,” he said.

Rising unemployment joins a growing list of indicators pointing to a slowing economy in the second half of 2024.

Weaker consumption growth, depleted savings, the decline in service activity, and corporate America’s warnings about an exhausted consumer all point to what appears to be an imminent slowdown.