Why Friday’s jobs report won’t compel Powell to cut rates

Will Friday’s jobs report compel Federal Reserve Chairman Jerome Powell to cut rates by 1%, as President Trump suggested on social media today? The answer is no. While the labor market is showing signs of cooling and there are some indications of stress in certain sectors of the economy, today’s report, although it exceeded estimates, reflected a negative revision of 95,000 jobs for the prior two months.

This data does not indicate enough labor market stress for the Federal Reserve to consider cutting rates at this time.

Unemployment rate unchanged

From the BLS: “Total nonfarm payroll employment increased by 139,000 in May, and the unemployment rate was unchanged at 4.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in health care, leisure and hospitality, and social assistance. The federal government continued to lose jobs.”

President Trump has been hounding Powell to cuts rate for some time now. Today, Trump posted: “Powell Should Cut Rates, Rates Should be Cut By A Full Point. ‘Too Late’ at the Fed a Disaster, Go for a Full point!” President Trump wants the Fed to get ahead of the curve, not fall behind. However, last month I talked about how I believe the Fed would be using phone calls to inform their policy on cutting rates and today we got more confirmation on this from Cincinnati Fed President Beth Hammack.

The New York Times reported today that Hammack has been talking to business leaders and although they feel nervous, she hasn’t heard about significant plans to lay off employees. The story says “She prefers to ‘wait and move quickly to play catch-up’ on policy moves. ‘I legitimately do not know which way this is going to break.’” (The company Procter & Gamble, which is headquartered in Hammack’s district, announced layoffs of 7,000 employees yesterday.)

My main point is that the Fed needs to see a significant decline in the labor market before they will adopt a more dovish stance and cut rates. Despite the negative revision of 95,000 jobs in prior reports, the labor market isn’t deteriorating enough for them to become more dovish yet.

Residential construction workers

Friday’s BLS report noted that residential construction workers faced two negative labor prints, which is an essential consideration in my examination of economic cycles. However, it is encouraging to see that the report not only indicated growth but also included positive revisions to the prior month’s net loss figures. This suggests that the labor recession indicator is showing resilience; while it may be softening, it has not fallen apart as seen in previous cycles.

As you can see in the chart below, this data line has been very key to my economic work for a reason. The gray bars are recessions and this labor sector tends to break before we go into a recession.

Layoffs of federal workers

This report acknowledges that there has been a decline in government jobs, affecting federal workers since the beginning of the year. While this figure is significant, especially given the slow growth in this sector over the years, consider the broader context. Currently, we have over 162 million individuals in the workforce, which provides us with a diverse labor pool. Still, the growth of government employment may face limitations in the future.

Unemployment rate data

If we observe a slight increase of 0.06% in the unemployment rate data, we would have reported a 4.3% unemployment rate today, rather than the current 4.2%. This adjustment reflects a more precise value of approximately 4.244%. Such a rate would mark the highest level since October 2021, when it reached 4.5%.

If the unemployment rate starts to rise more than this level,  it will make the Fed’s position on not cutting rates more challenging. Some Fed presidents have even adjusted their unemployment rate targets due to the impact of the so-called “Godzilla tariffs.” The onus is now on them to address these developments in light of their previous stance from last year.

It’s also important to consider that as labor supply continues to slow, fewer individuals are actively seeking work, which could result in a lower unemployment rate compared to last year, when job seekers were more plentiful. Therefore, any further rise in the unemployment rate at this juncture may serve as an additional indicator of a challenging labor market.

Conclusion

Today’s report wasn’t a big game-changer for the Fed, but it does highlight the risk that any economic shocks can make the labor data get weaker and bring the unemployment rate higher than they would like. In general, the Fed has taken a stance on waiting to see what the tariffs will do to the economy, but this is similar to what they have always been saying: they want to see more labor damage before they get more dovish.

Remember, the only reason they cut rates by 1% last year was because the labor data was getting much softer on them and they didn’t want their policy to be too restrictive. Now, it’s a waiting game for rate cuts. The question is: will they be too late on cutting rates again?