Is the Job Market Cooling Too Quickly?

Inflation isn’t the number one threat to the U.S. economy anymore if you ask Federal Reserve Chair Jerome Powell.

In his testimony on Capitol Hill this week, he noted a weakening job market is also on the central bankers’ minds.

Cooling Across Markets

In June, the unemployment rate rose to 4.1% from 3.6% the year before, the highest level since 2021, according to data from the Bureau of Labor Statistics. People are also staying unemployed for longer, a sign that it is becoming harder to find a job.

This slowly weakening job market comes as economic activity is cooling, due in part to elevated interest rates. The Fed has kept interest rates at a multi-decade high for a full year, in an attempt to tame inflation, which still remains above the Fed’s target rate of 2%.

Higher interest rates make it more expensive to borrow money for individuals and companies, which can slow down economic activity and cool inflation. But it can also pressure American households — both directly, through higher rates on debts, and also indirectly as slower business growth can weigh on hiring.

Balancing Act

The Fed now is facing a difficult decision. Lowering interest rates too soon could cause inflation to come roaring back. But waiting for too long to cut rates could hurt the labor market.

In fact, the speed at which the unemployment rate has risen has set off at least one red flag. The so-called Sahm Rule, which is considered a recession indicator, says that a downturn may be ahead when the jobless rate rises at least half a percentage point in 12 months or less.

That said, the U.S. labor market is still strong by historical standards, and the economy added 206,000 jobs in June, in line with economists’ expectations. The next few months may mark a critical to see what direction the economy, and the Fed, are headed in.

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