Did the Federal Reserve make a significant blunder?
Fed Governors Dissent as Job Growth Slows and Unemployment Rate Ticks Up
The Federal Reserve kept interest rates steady on Wednesday, extending a wait-and-see pattern that began in January. However, two of its governors, Christopher Waller and Michelle Bowman, cast dissenting votes, marking the first time more than one Fed governor has done so since 1993.
The Labor Department reported that the job gains for the prior two months were revised downward, and employers added just 73,000 jobs in July, which is below the threshold of monthly job growth necessary to keep up with population growth. The average pace of monthly job growth from May through July was the weakest than any other three-month period since 2009, outside of the pandemic recession in 2020.
Michelle Bowman stated that the labor market has become less dynamic and shows increasing signs of fragility. She expressed her concerns about the slowing job growth and the potential risks it poses to the economy. Bowman also pointed out that only a few industries have propelled job growth this year, and this trend continued in July.
Waller and Bowman dissented from the Federal Reserve's decision to keep interest rates steady because they favored lowering the federal funds rate by 25 basis points (0.25%). Their dissent reflected concerns that the labor market and economic growth were moderating enough to justify an easing of monetary policy.
While the Federal Reserve noted the labor market conditions as "solid" and the unemployment rate "low" overall, Waller and Bowman appeared to believe that recent data indicated slower economic growth and potential risks that warranted a rate cut. Their stance suggested they saw the labor market not as robust enough to maintain current interest rates without risking economic slowdown or other vulnerabilities.
This disagreement marked a rare instance where more than one member of the Federal Open Market Committee opposed the majority, highlighting a growing divide in views on the timing of rate changes amid inflation remaining somewhat elevated and the economy showing signs of moderation.
Beth Hammack, Cleveland Fed President, expressed confidence in the decision made earlier this week, despite the disappointing July jobs report. Jerome Powell, the Fed Chair, stated that a "solid" labor market allows the central bank to wait and see how President Donald Trump's tariffs affect prices before resuming rate cuts. However, both Waller and Bowman pointed to signs of weakness in the labor market as a major reason for their dissent, while downplaying the potential effects of Trump's tariffs on prices.
Jamie Cox, managing partner at Harris Financial Group, commented that Jerome Powell may regret holding rates steady this week. The Fed did not respond to a request for comment regarding the job market's shakier state.
In December last year, employers added a massive 323,000 jobs, and the unemployment rate edged down from the prior month to 4.1%. However, the unemployment rate ticked up to 4.2% from 4.1% this month, suggesting that the job market may be on shakier ground than previously suggested. Hammack suggested that it may be too soon to conclude that the Fed has royally screwed up, as they try not to make too much out of any one individual report.
The disagreement between Waller, Bowman, and the majority of the Federal Reserve highlights the ongoing debate about the health of the US economy and the appropriate monetary policy response. As the job market slows and unemployment rate rises, more dissenting voices may emerge within the Fed, leading to further discussions and potential policy changes in the coming months.
- The slowing job growth and rising unemployment rate have led governors Waller and Bowman to voice their concerns about the economy's potential risks, eligible industries being the main drivers of job growth.
- With the job market showing signs of fragility and moderate economic growth, governors Waller and Bowman, in opposition to the Federal Reserve's decision, favor a 25 basis points reduction in interest rates to mitigate these risks.
