Aggressive Fed Action Needed

Friday's surprising unemployment numbers gave the Federal Reserve the additional evidence needed that even a neutral stance is now too conservative. The unemployment rate had been very low in 2022 and 2023 helping fuel wage inflation. The average unemployment rate averaged 3.6% during those years, The chart below shows that not only is unemployment growing but

July's number raises the specter that it is accelerating. It's the first time it has grown 0.2 since February, but February was preceded by a 0.0 (flat) reading and followed by a -0.1 decline. July was preceded by a 0.1 increase. There will be another set of employment numbers before the next Fed meeting so they will see if there was a statistical aberration that caused the increase or if the rising trend continues.

From what I see, even a flat August unemployment rate with continued weak job creation would justify a 1/4 percent reduction. Anything more should prompt a 1/2 percent reduction because continued rising unemployment goes against their mandate as much as excessive inflation. With headline inflation at 3.0% year over year and declining. The argument for continued inflation vigilance in such a scenario would be unwarranted.

I read that some were calling for an emergency Fed meeting. While the recent news points to the need to reduce rates, Fed policy is slow acting. Even a 1/2 percent reduction will not immediately change the economy's course. The Fed shouldn't dictated to by market demands, but at the appropriate time they should be considered in policy making.