On each point, the Fed is off base. Payroll gains are hard to interpret because of sudden changes in immigration. Likely, the number of net new payroll jobs needed to keep up with population growth is below 50,000 per month. It is even conceivable that future changes in net immigration flows could imply that the break-even number of monthly net payroll gains may become negative: net reductions in the level of employment could be required for the labour market to keep up with population changes.
As was widely expected, the US Federal Reserve has lowered its policy rate by 25 basis points (bps), to 4%–4.25%. A slight majority of the rate-setting Federal Open Market Committee (FOMC) expect to cut again at both the October and December meetings, with additional easing expected next year. But the Fed is being too dovish, and risks setting itself up to hike interest rates next year.
The case for beginning a monetary-easing cycle this month rests on three judgments. First, the deterioration in headline payroll gains — the economy has added an average of just 29,000 net new jobs per month over the past three months, and employment contracted in June — is a strong indication of a weakening labour market. Second, underlying inflation is on course to return to the Fed’s target, albeit gradually. And third, there is a considerable distance between the Fed’s policy rate and the rate at which the Fed would no longer be holding back economic growth. The Fed estimates this so-called neutral rate to be 3%.
