– Gov. Cook Calls Jobs Report ‘Concerning’ – Could Mark ‘A Turning Point’
– Cook Also Sees ‘Quite Elevated’ Stocks as Potential Threat to Financial Stability
– Daly Fears ‘Softening’ Labor Market; Must ‘Adjust’ Rates ‘In Coming Months’
– Collins Speaks About ‘Wait and See’ Approach Among Economic Players
By Steven K. Beckner
(MaceNews) – A trio of Federal Reserve officials gave at least tentative indications Wednesday that they may be prepared to resume normalizing short-term interest rates before much longer.
The three officials – two Federal Reserve bank presidents and one member of the Fed’s board of governors, voiced support for the Fed’s commitment to price stability, but two of them expressed heightened concern about deterioration in the labor market.
Gov. Lisa Cook called Friday’s surprisingly weak July employment report “concerning” and warned that the large downward revisions of the type announced by the Labor Department have often signaled “turning points” in the economy.
She also suggested the economy may be vulnerable to financial instability arising from “quite elevated” stock prices.
Boston Fed President Susan Collins, appearing with Cook at a panel discussion hosted by her bank, was less outspoken, but said many of her business contacts are taking a “wait-and-see” approach to investment due to heightened uncertainty about the economic outlook. And she said the Fed needs to be making monetary policy on the basis of where the economy is headed, not where it is.
Later, San Francisco Fed President Mary Daly expressed confidence that inflation will continue to move lower, but sounded more worried about the “softening” labor market and said the Fed will “likely need to adjust policy sometime in the coming months,”
She did not give a more specific timetable, but cautioned that waiting too long would risk being “too late.”
The comments come a week after the Fed’s rate-setting Federal Open Market Committee voted to leave the federal funds rate in a target range of 4.25% to 4.5% for a fifth straight meeting after lowering that key policy rate by 100 basis points over the last three meetings of 2024. Two Fed governors, Michelle Bowman and Christopher Waller dissented for the first time since 1993 and later gave bluntly written defenses of their case for immediate rate cuts.
Also Wednesday, Minneapolis Fed President Neel Kashkari called for two 2025 rate cuts. “The economy is slowing, and that means in the near term it may become appropriate to start adjusting,” he told CNBC, adding that two 25 basis point cuts by the end of the year “seems reasonable to me.”
Chair Jerome Powell did not rule out a rate cut when the FOMC meets again Sept. 16-17, but said “no decisions” have been made about that meeting.
Since the meeting, President Trump has continued to pressure Powell and his colleagues to slash rates. He has demanded 300 basis points of reductions.
He further turned up the heat after a weaker than expected July employment report that was accompanied by unusually large downward revisions to May and June non-farm payrolls.
Powell and other policymakers have said that weakness in the labor market is a factor that could lead the FOMC to put less weight on inflation control and make monetary policy less restrictive.
At the time of the FOMC decision, the prevailing view was that the economy and labor markets were too “solid” and inflation too high to warrant monetary easing. As Powell put it, “it seems to me and to almost the whole committee that the economy is not performing as (if) a restrictive policy is holding it back inappropriately and modestly restrictive policy seems appropriate.”
Further explaining the FOMC’s decision to leave the funds rate in a “moderately restrictive” stance, Powell said, “Inflation is above target. When we have risks to both goals, one of them is farther away from goal than the other and that’s inflation. Maximum employment (is) at goal. That means policy should be tight because tight policy is what brings inflation down.”
Powell allowed for shifting to a less restrictive policy if labor markets were to move further from the Fed’s “maximum employment” goal. “If you came to the view that the risks of the two were more in balance, that would imply that policy shouldn’t be restrictive. It should be a more neutral stance. And that would be somewhat lower than we are now.”
Two days later, the July employment report showed significantly weaker labor market conditions. Not only did the Bureau of Labor Statistics report a smaller than expected 73,000 gain in non-farm payrolls, it announced that May and June job gains had been a combined 258,000 less than it had first reported – such a whopping downward revision that a furious Trump fired BLS Director Erika McEntarfer.
The unemployment rate rose a tenth to a still historically low 4.2%, but the BLS reported longer stays on the jobless rolls.
And there have been other signs of economic weakness. Although real GDP was estimated at 3% in the second quarter, private domestic final purchases grew a meager 1.2%. And the Institute for Supply Management’s manufacturing survey found further contraction.
On the other side of the Fed’s dual mandate, the day after the FOMC meeting, the Commerce Department published a worse-than-expected reading on the Fed’s favorite inflation gauge – the price index for personal consumption expenditures. A 0.3% June rise in the PCE left it up 2.6% from a year earlier and 2.8% on a core basis, while the annualized core PCE exceeded 3%.
On net, alarming job numbers seem to have made the greater impression on Fed thinking, judging from officials’ comments.
Cook said policymakers “need to be cautious and humble” in assessing the economic outlook but was quick to add that “the jobs report is concerning.”
With the steep downward revisions, the economy generated just 35,0000 new jobs per month over the last three months, she noted, adding that such “major revisions … are somewhat typical of turning points.”
The downward revisions “speak to uncertainty” about the outlook, Cook continued, adding, “we want to know not just where we’ve been but where we’re going.”
“If we’re at an inflection point, we need to look at data that speak to an inflection point,” she went on. She said “the unemployment rate is still a good indicator of slack, but we need to look at a panoply” of data.
When Boston Fed Director of Research Egon Zakrajsek likened the current boom in technology stocks to the “dot com” bubble of the late 1990s, Cook didn’t predict a similar outcome, but did say, “That is something I worry about from a financial stability standpoint.”
She noted that in the Fed’s latest Financial Stability Report “we talk about these rich valuations; they are quite elevated.”
As for inflation, Cook said investment in artificial intelligence, outpacing other types of business investment, “could be disinflationary (and) counter factors that are inflationary,” but she said
AI “may not be able to be relied on within a certain period of of time.”
In trying to make monetary policy take into account the potentially inflationary impact of higher tariffs, she said “AI may not come fast enough to counter those” risks.
Collins, meanwhile, took a more lowkey approach, but agreed there is great uncertainty about the fate of the economy. She emphasized that the Fed needs to take a more “holistic” approach to analyzing and forecasting the economy, relying on more than just monthly, back-ward looking statistical reports.
The FOMC voter said, “uncertainty is leading to wait and see” in her New England-based First District. She said firms are telling her it’s hard to decide “when to adjust prices if you’re not sure what level tariffs will be.”
At the same time, she said uncertainty raises the question of “whether to take more forceful action rather than wait and see …. You may want to get ahead of that.”
Although Collins was talking about the business community, she could just as well have been talking about monetary policy decision making.
In a discussion of “r*” — the estimated real equilibrium short-term interest rate that factors into estimates of the “neutral” funds rate – both Cook and Collins agreed that it is an important concept, but one that is difficult to pin down and subject to much disagreement among Fed officials.
Collins said r* is useful in “assessing how restrictive our monetary policy stance is,” but said it is “highly uncertain” and there are great differences about its “underlying trend.”
Cook remarked that she “hates” marking down her estimate of the longer run neutral funds rate in the FOMC’s quarterly Summary of Economic Projections “because this debate is actively going on.”
“We have to be very careful … how we adjust our view about r*,” she added.
Daly, speaking at the 2025 Anchorage Economic Summit in Alaska, was asymmetric in how she spoke about the economic and policy outlook.
Although she said, “the risks to our employment and inflation goals are roughly balanced,” she suggested that they are in danger of tilting toward weaker employment. She seemed to suggest less concern about the Fed’s inflation mandate.
“Inflation, absent tariffs, has been gradually trending down, and with a slowing economy and ongoing restrictive monetary policy, should continue to do so,” Daly said. “Tariffs will boost inflation in the near term, but likely not in a persistent way that monetary policy would need to offset.”
“At the same time, the labor market has softened,” she went on. “And I would see additional slowing as unwelcome, especially since we know that once the labor market stumbles, it tends to fall quickly and hard.”
“All this means that we will likely need to adjust policy sometime in the coming months — recalibrating it to match the collective risks to both of our mandated goals.”
Daly did not say whether she thinks the FOMC should “adjust” rates in September, but she did warn that the Fed cannot wait too long or it runs the risk of being “too late.”
Preceding those comments, the non-voting Daly referenced Trump’s trade and other policies and said “it will take time for the full effect of these policies to be known, but we are already seeing some early impacts. Tariffs and immigration changes are showing through, pushing up inflation and reducing the pool of available workers.”
She said “these dynamics pose two challenges for monetary policy. First, they are moving the economy, particularly inflation, in different directions. Monetary policy is pulling inflation down, while tariffs are pushing it up.”
Daly said, “recent policy changes have created uncertainty, making it harder to know exactly how the economy will evolve.” Not only is it harder for businesses to make decisions, it “makes it harder for us.”
“And this makes monetary policy decisions more difficult,” she went on. “We don’t have perfect clarity. But the truth is central banks rarely have perfect clarity, and we can’t wait for it to act.”
Responding to questions about the Fed’s dual mandate, Daly remarked, “full employment is important, (because) we can’t give people lower inflation but take their jobs.”
Hours after the employment report was released Friday, Atlanta Fed President Raphael Bostic said it made him think “”it’s appropriate to rethink everything.”
The non-voting Bostic, who had previously favored just one 25 basis point rate cut this year, added, “If it looks like the labor market is weakening in a sustained way, such that the risks on that side have increased to be greater than risks on the inflation side, then I’d be open to increasing the number of cuts.”
“Today, I don’t see that,” he went on. “Inflation is still further from its target than employment is from its. But we’ll have to watch and see how things evolve over the next several months.”