MNI INTERVIEW:Fed Cuts Near, Hiring Weaker Than Appears-Wilcox

The cooling labor market and encouraging inflation data have solidified the case for lowering U.S. interest rates in September, particularly as new research suggests strong hiring belies a broader softening in employment conditions, former Federal Reserve Board of Governors research director David Wilcox told MNI.

There’s evidence that the “breakeven” pace of job growth needed to maintain constant labor market pressure has moved significantly higher than the 100,000 or so a month economists normally cite, Wilcox said. That could mean the average monthly pace of payrolls growth of 222,000 over the past six months isn’t as strong as it appears.

“The FOMC needs to be a little cautious here. A number of members say ongoing strength in the labor market gives them time to await further encouraging inflation news. This reinterpretation weakens that argument,” Wilcox said in an interview. “It’s not a marked weakening. It’s still in healthy condition, but the direction of movement is clearly softening.”

“When you combine that with progress on inflation, that strengthens considerably a case for a cut in September.” (See MNI INTERVIEW: June CPI Seals The Deal For Sept Fed Cut-Tilley)

BREAKEVEN RATE SPIKES

A surge in immigration and labor force participation has boosted the degree of employment growth the labor market can sustainably accommodate, according to research from the Brookings Institution and the San Francisco Fed.

The current breakeven employment growth rate could be between 160,000 and 230,000 jobs a month, those economists estimate, double the level needed to keep up with population growth had immigration not picked up over the past two years.

A separate analysis by Wilcox, now director of U.S. economic research at Bloomberg Economics and senior fellow at the Peterson Institute for International Economics, takes an entirely different approach and arrives at even higher breakeven rates. Applying the strong historical relationship between payrolls growth and the unemployment rate, he estimates the rate of job growth needed to keep the latter from rising is between 200,000 and 300,000 a month.

“The puzzle has been why the unemployment rate has been drifting up since April 2023 – it’s risen seven-tenths – while job growth has been pretty strong by historical standards,” Wilcox said. “The most reasonable explanation is the thermostat on job growth has suddenly shifted very dramatically.”

“Normally I’m reluctant to put my name to something as novel as that, but I think it’s pretty hard to escape that conclusion when you recognize the simple confluence of job growth that looks strong, but is not strong enough to keep the unemployment rate from rising.”

RATE CUT PACE TBD

If the labor market weakens more quickly, the FOMC would be inclined to cut at every meeting, as would be the case if inflation data remain as encouraging as has been the case over the past two months, Wilcox said. Officials could cut every other meeting if there's no particular reason to go faster. (See MNI INTERVIEW: Trump Win Would Risk Ending Fed Cuts- Rosengren)

The FOMC likely won't decide on the pace of cuts until September, and even then, “they can turn the dial up or down,” Wilcox said. “There’s no reason they need to lock themselves in.”

Officials are also unlikely to make a judgement on the end point of rate cuts until the last possible moment, he added.

“This will be a process of feeling their way along.”