The Fed’s wrong move

As was widely expected, the United States Federal Reserve has lowered its policy rate by 25 basis points, to 4-4.25 per cent. A slight majority of the rate-setting Federal Open Market Committee (FOMC) expects to cut again at both the October and December meetings, with additional easing expected in 2026. But the Fed is being too dovish, and risks settingitself up to hike interest rates next year.

- MICHAEL R STRAIN

‘The case for beginning a monetary-easing cycle this month rests on three judgments. First, the deterioration in headline payroll gains — the economy has added an average of just 29,000 net new jobs per month over the past three months, and employment contracted in June — isastrong indication ofa weakening labour market. Second, underlying inflation is on course to return to the Fed’s target, albeit gradually. And third, there is considerable distance between the Fed’s policy rate and the rate at which the Fed would no longer be holding back economic growth. The Fed estimates this so-called neutral rate to be 3 per cent.

Oneach point, the Fed is off base.

Payroll gains are hard to interpret because of sudden changes in immigration. Itis likely that the number of net new payroll jobs needed to keep up with population growthis below 50,000 per month. It is even conceivable that future changes in net immigration flowscouldimply thatthe break-even number of monthly netpayroll gains may become negative: Net reductions in the level of employment could be required for the labour market to keep up with population changes.