Has the Fed fallen behind?

At his post-FOMC media scrum just two days ago, Fed Chair Jerome Powell repeatedly reminded his audience that the Fed's mandate requires it to focus on two goals: maximum employment and stable prices.  He described the Fed's current stance this way: "we weigh those two things equally under the law. When we were far away from our inflation mandate, we had to focus on that. Now we're back to a closer to even focus, so we'll be looking at labor market conditions and asking whether we're getting what we're seeing and as I said, we're prepared to respond if we see that it's not what we wanted to see, which was a gradual normalization of conditions". 

This morning the BLS reported that US employment gains slowed sharply in July, falling to 114,000,  compared to an average of about 170,000 in the preceding three months, pushing the unemployment rate up to 4.3 percent. This was the second-lowest monthly gain, behind only April of this year, since the depths of the COVID slowdown in December 2020. It is generally (and correctly) assumed that the Fed is given a sneak peak at any imminent data releases that may have a major impact on its decision making, so it's hard to believe that it did not have at least a general idea of how today's numbers were going to look. Has it, as Senator Elizabeth Warren stated this morning, "made a serious mistake in not cutting interest rates" this week?

All central banks hate to see their rate decisions turn into political footballs. Chair Powell tried to make it clear at his media conference that the timing of any Fed rate moves this year would not be influenced by anything relating to the Presidential election. (Recall that after the September meeting, where a rate cut is now seen as fully baked in, the next FOMC session begins on November 6, the day after election day).  Perhaps so, but the loud criticism from Senator Warren makes it perfectly clear who stands to lose the most if the Fed gets it wrong. If the much-touted successes of "Bidenomics" are starting to unwind, the impact on the Harris election campaign could be severe indeed. 

A rate cut this past Wednesday would have been something of a surprise, but markets would have fully understood it as soon as today's non-farm payrolls data appeared.  Now, the Fed has placed itself in a truly invidious, "damned if you do, damned if you don't" position. Powell will surely ignore Senator Warren's demand that he "cancel his summer vacation and cut rates now — not wait 6 weeks.” But whatever choice he and the FOMC make from now on (a 25 bp cut in September? -- too little too late!; a 50 bp cut? -- panic stations!) -- will be fodder for the election campaign, a very uncomfortable situation for the Fed. 

With the benefit of just two days' hindsight, it's hard to see this week's rate decision as anything other than an unforced error.