The Fed just got the green light to cut rates

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The June report on job creation led to a let-down and so the US economy produced 224,000 jobs as of last month, attempting to put rest to fears of a recession in the market. Stock futures have decreased and Treasury revenue increased post the release of this report. Investors took this as a sign that the Federal Reserve may forego the interest rate cuts to bolster companies which were faltering.

However, the slack in the labour market prompted them to do exactly that and cut interest rates. Headline job gains exceeded expectations in June, due to which wage growth did not reach its goal, a rise of 0.2% was seen in wages last month, and 3.1% over the last year. The unemployment rate has also increased due to an increase in the labour force participation rate.

These numbers indicate that the economic expansion of the decade will continue to invite fresh workers into the labor pool. It seems that these planned rate cuts by the Federal Reserve aspire to elongate the economic cycle instead of reacting to the rolled over expansion.

A 25 basis point cut in July wouldn’t be an ‘overreaction’

The chairperson of the Federal Reserve, Jay Powell, spoke at the Council on Foreign Relations last month about the crosscurrents which the US economy has been head to head with in the last few months such as trade disputes.

He cautioned that the Federal Reserve analyses data from a long term perspective while creating a monetary policy, and this prospect alone causes a certain amount of vagueness to surround it. Some Fed officials have argued in favour of cutting interest rates 50 basis points, saying that it is an appropriate move since the inflation has undershot the 2% target set by the central bank. The move is to open doors for interpretations by the market of an overreaction by the Federal Reserve.

The 25 basis point cut in July was put into place to support a slowing labour market. And yet shows signs of excess slack so as to justify a below target inflation.

The chief US Economist at High Frequency Economics, Jim O’Sullivan, said that the data released on Friday is unlikely to prevent the Federal Reserve from easing the upcoming meeting. He said that the easing shows worry about dragging on the trade relating disputes in the economy while a sub-par inflation looms the horizon. The report is an addition to the prospective that the easing may be limited to 25 points rather than 50.

On Friday, the market may indicate a decline, but an aggressive move by the Federal Reserve is possible. The Fed’s path to cutting back on interest rates has become clearer still since the slowdown on the economic situation in the US.

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