Labor market can’t cool ‘too much more’: Fmr. Fed Vice Chair

Federal Reserve Chair Jerome Powell solidified that the time for rate cuts has arrived during his speech at the Jackson Hole Economic Symposium on Friday.

Former Fed Vice Chair Alan Blinder joins Yahoo Finance Fed reporter Jennifer Schonberger from the Kansas City Fed’s Economic Symposium to discuss his outlook on the Fed’s next moves.

Blinder, now a Princeton University professor of economics and public affairs, suggests that while something “unusual” could happen in the four weeks leading up to the next Fed meeting, he anticipates a 25-basis-point cut in September if conditions remain stable.

Addressing the timing of rate cuts, Blinder notes, “Yeah, I think they’re a little behind the curve, but we don’t want to exaggerate this too much,” indicating that the Fed still has an opportunity to correct course.

Blinder cautions that the labor market can’t cool “too much more” without risking a recession. While unemployment has been slowly increasing, he warns, “you don’t want to keep that up for very long.”

“I think what they’re hoping for is that the unemployment rate peak is not very far off, that we’re very close to it. In which case, you can move at a deliberate pace and not give off the aura of ‘Oh my God, we missed the boat. We better get on the boat quickly before it sails away from us,'” he tells Yahoo Finance.

Looking ahead, Blinder predicts the possibility of three rate cuts materializing before the end of 2024.

Watch Federal Reserve Chair Jerome Powell’s full speech here.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Angel Smith

Video Transcript

Fed correspondent Jennifer Schonberger standing by with former Fed vice chair Alan Blinder.

Jennifer, take it away.

Thanks so much, Brad.

Professor Blunder.

Thanks so much for joining me here in Jackson Hole.

It’s great to have the programme.

You heard Pal’s speech this morning.

Are they going 25 basis points in September?

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That would be my guess.

Now we still have almost four weeks, and something unusual could happen.

I don’t expect by saying something unusual.

It means you don’t expect it to happen.

Assuming nothing like that happens.

That’s what I would guess.

You penned an op ed in The Wall Street Journal back in July.

You thought the Fed could have cut rates in July.

Since then, we’ve seen inflation continue to come down the job market, soften a bit.

Do you think the feds behind the curve?

Yeah, I think they’re a little behind the curve, but we don’t want to exaggerate this too much.

That was the last day of July, The last meeting and what are we today?

August 24th.

So not that much time has gone by a few more weeks to the next meeting.

So I’d say the, uh they’re a little bit behind the curve, but not drastically Have the chances for a recession increased as a result, It doesn’t look at, you know, uh, it’s hard to remember back.

And exactly how did the data look in the middle of July?

I don’t think it looked very different from it does today.

Uh, you know, there are a lot of numbers on inflation on consumer spending on, uh, pro, uh, production and so on.

If you put them all together, I think the economy looks pretty similar now than it did then.

Which, of course, is one reason why I was back then back then, uh, advocating that they should cut interest rates.

But what about the job market?

You know, we’ve seen the unemployment rate jump up.

Yes, it’s because more people are entering the labour force.

But typically, when you see the unemployment rate jumped by half a percent from its low over the past year, we’ve seen the unemployment rate jump a lot more and the economy has been in recession.

So can the job market continue to cool without a recession?

Not too much more.

Uh, so the little answer to your question is Yes, a bit more.

But if it’s been going up smoothly, actually, in the last four or five months at, uh, 1/10 of a point on unemployment per month, you don’t want to keep that up for very long.

I mean, if you do that for a year, you’re up 1.2% points.

And that’s why Powell probably said the Fed is prepared to do what is necessary to make sure that the job market doesn’t weaken further, right?

Yeah, he used that phrase.

He doesn’t want to see it weaken further now.

So then what does that mean for the policy path?

As we go through the fall here, it means that in in, I think it means that interest rate cuts start right away at the next, uh, meeting.

It means that if the labour market should deteriorate more than he and the Fed now expect, there could be an acceleration of the interest rate cuts start doing fifties or something like that.

If not, I think what they’re hoping for is that the unemployment rate peak is not very far off that we’re very close to it, in which case you can go move out of the liberate pace and not give off the aura of uh oh, my God.

We missed the boat.

And we better get on the boat quickly before it sails away.

So how many cuts do you think we’re going to see this fall in the fall?

Two or three?

I think so.

We we could go possibly every meeting.

Then it sounds like, Yeah, there aren’t that many meetings.

We’ve got three left.

I was go ahead before I let you go really quick.

Donald Trump has said that the Fed should not cut rates before the election, clearly going to be cutting in September.

He’s also talked about the president having a say in setting monetary policy.

Your response to that?

The president has a say in setting monetary policy exactly as he or she should under our current arrangement, which is that he or she gets to put people on the Federal Reserve Board.

These are presidential appointees, Uh, and that’s great.

And by dint of that, uh, appointment power of any president and a succession of presidents exercises very gradual influence on the Federal Reserve in the language that we all use Now, they put more dovish people or more hawkish people as they want.

That’s not what Donald Trump meant.

Well, unfortunately, we’re going to have to leave the conversation there.

But Professor Blinder, thank you so much for your insight, so appreciate it.