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With signs of cooling inflation and job growth, debate rises on whether the Federal Reserve should cut interest rates, weighing risks of low rates versus sustaining expansion.

New data shows the U.S. job market and inflation moderating, intensifying debate on potential Fed rate cuts. This article analyzes the key considerations around interest rate policy.

The Debate on Fed Rate Cuts as the U.S. Job Market Slows

The latest economic data shows signs of the U.S. job market and broader economy cooling down, sparking fresh debate on whether the Federal Reserve should cut interest rates to sustain growth. This article analyzes the key issues in this debate on potential Fed rate cuts in the coming months.

Introduction

The Federal Reserve's monetary policy decisions on setting interest rates have powerful impacts on jobs, inflation, and overall economic growth. With new economic data released in July 2024 showing deceleration in the U.S. labor market and inflation, expectations for a Fed rate cut are rising. However, the central bank also risks negatively impacting savers and the dollar's value. This article weighs the merits of both sides - those advocating imminent cuts to boost jobs versus others preferring patience to ensure prices remain stable.

Jobs Growth Moderates as Unemployment Rises

The latest data from the Labor Department shows average monthly payroll gains over the past three months downshifted to 177,000 in June. This is below the ~200,000 level some Fed policymakers believe is needed simply to keep pace with population growth from immigration and new labor force entrants.

![Chart showing declining job growth][]

Jobs growth has moderated in recent months

In tandem with slower jobs creation, the national unemployment rate also rose to 4.1% in June 2024. While still historically low, this uptick hints at cooling in labor demand.

Several policymakers at the Fed highlighted unexpected labor market weakness as a potential trigger for interest rate cuts. With both metrics now shifting, it strengthens the case for a cut to sustain the decade-long expansion.

Weighing the Merits

Pro-Cut Argument: Modest rate reductions now could prolong economic growth and jobs creation, which still lags prior cycles. This prevents recessionary risks.

Anti-Cut Argument: With unemployment low, the priority should be preventing any resurgence of high inflation. Patience is needed.

Earnings Growth Decelerates Too

Beyond the headline jobs figures, the data also shows some tentative signs of easing wage and inflation pressures:

• Average hourly earnings were up 3.9% year-over-year in June, falling short of 4%+ pace for first time in 3 years
• Anecdotes of hiring freezes and lower bonuses emerging
• Consumer price inflation has hovered below 2% target

The Fed has signaled it wants clear confirmation of inflation sustaining around 2% before contemplating rate cuts. The easing earnings and price trends lend credence to patience.

September Cut Odds Rise on 2024 Policy Path

While no change is expected at the July FOMC meeting, market odds of a September Fed rate cut have risen to ~70% on the above trends. December 2024 also shows rising probabilities of a second reduction.

Fed Chair Jerome Powell has scope to shape expectations in his upcoming Congressional testimony. The direction he signals on the policy path amid the latest data will sway investor perceptions.![Image of Fed Chairman Jerome Powell][]

All eyes on Fed Chair Powell's upcoming Congressional testimony

If the current economic deceleration persists, by September there could be enough evidence for the first rate cut in over a decade.

Main Trade-Offs For The Fed

The Fed must balance risks of lower rates fueling excessive inflation versus higher rates triggering an economic downturn. The next few months of data will shape this assessment.

Conclusion: Data-Dependent Fed Faces Dilemma

With signs of cooling in both key targets of jobs and inflation, the Federal Reserve faces an increasingly complex dilemma in charting the policy path ahead. The July and September meetings will be pivotal in reconciling whether preemptive rate cuts are now warranted to sustain growth or if patience remains prudent to ensure price stability. This debate highlights the difficult trade-offs central banks navigate.

The above analysis covered the key issues and arguments around potential Fed interest rates cuts as both jobs and inflation show tentative signs of slowing. It remains an open question whether cuts should start in September 2024 or if a more cautious approach is preferred. With risks on both sides, expect vigorous debate on this topic in coming months.

Let us know your thoughts by commenting below! Please share this article if you found it useful in understanding the complex dynamics around potential Fed rate cuts in coming months.