Introduction

Last week, Federal Reserve Chair Jerome Powell signaled a potential interest rate cut in September, a gamble aimed at supporting a faltering labor market while keeping inflation under control. This move comes amid increasing concerns about the weakness in the labor market, despite stable unemployment rates and low layoff rates for most of the past year.

The Labor Market at a Crossroads

Powell described the current labor market as an "odd balance," revealing growing concern within the Federal Reserve about the prospects for employment. Although official data may not reflect the full picture, there are worrying signs indicating a slowdown in hiring. Companies are becoming less enthusiastic about hiring, and new entrants to the labor market are struggling to find suitable jobs. This slowdown raises questions about the sustainability of current economic growth.

Tariffs and the Fed's Role

Scott Anderson, Chief US Economist at BMO Capital Markets, points out that one of the main reasons the Federal Reserve is considering cutting interest rates is to help companies cope with the impact of tariffs imposed by the Trump administration. Anderson believes Powell is sending a clear signal to companies that they can move forward with their investment plans, continue spending, and avoid mass layoffs. In addition, Anderson points out that Powell hinted that the Federal Reserve is able to recognize price increases caused by tariffs, a position he considers logical.

Limited but Positive Impact

Nancy Vanden Houten, Chief Economist at Oxford Economics, agrees with this view, noting that a 25-basis-point rate cut will not radically change the course of the economy, but it may have a positive impact on boosting market confidence. Vanden Houten adds that the explicit support Powell showed for cutting interest rates in his Jackson Hole speech was surprising, and she considers the July jobs report to be a crucial turning point in changing the Federal Reserve's position.

Data Revision Raises Concerns

The revised jobs report revealed a sharp slowdown in job growth, with an average of only 35,000 new jobs added per month since June, significantly lower than the average of 168,000 jobs in 2024. This revision raised serious concerns within the Federal Reserve and prompted the Trump administration to fire the chief statistician at the Department of Labor.

A Dual Mandate Amid Challenges

The Federal Reserve faces a dual mandate to curb inflation and maintain the health of the labor market. The White House's decision to impose tariffs on imported goods complicates achieving these two goals. In theory, Federal Reserve officials had previously stated that in the event of high inflation and economic weakness at the same time, the goal that deviated from its normal course more should be identified. According to this logic, the Federal Reserve should prioritize controlling inflation and maintaining high interest rates. But Powell's speech turned this scenario upside down, as he made it clear that the Federal Reserve believes the labor market needs "urgent help."

Rising Risks in the Labor Market

Powell warned that "downside risks in the labor market are rising. Once these risks materialize, they may rapidly deteriorate in the form of layoffs and increased unemployment rates." Jonathan Millar, Senior US Economist at Barclays, believes that the main reason for Powell's audacity in sending the signal of change is the absence of signs of tightness in the labor market, and the lack of bargaining power among workers to drive up wages.

Absence of Wage-Price Spiral

It is known that one of the biggest risks of inflation comes from the "wage-price spiral," where workers demand higher wages, prompting companies to raise prices. But Millar points out that "there are currently few signs of wage acceleration." Although immigration restrictions may have caused labor shortages in some industries, this effect is limited to a few areas.

The Future of Interest Rates

Millar believes that the pace of interest rate cuts in the remainder of 2025 and 2026 will depend on changes in the unemployment rate in the coming months. Vanden Houten emphasizes that Powell will insist on his position that "cutting interest rates is not to stimulate the economy." She adds that the current interest rate range of 4.25% -4.5% is still higher than the level of the natural economic cycle.