Weak non-farm data is useless? Williams remains "cool": the labor market is still robust!!!
The U.S. July employment report shook financial markets, significantly increasing the likelihood of a rate cut at the Fed's September meeting. However, two Fed officials insisted last Friday that the U.S. labor market remains in good balance, describing the latest weak data as a gradual cooling rather than a worrying deterioration.
Federal Reserve President Williams said in an interview last Friday that he would attend the September meeting with a "very open mind." However, he also provided a more cautious assessment to temper market expectations for more aggressive easing policies.
"What we have seen over the past year is a moderate and gradual cooling of the labor market, but it remains robust," said this important ally of Fed Chair Powell.
Federal Reserve officials had differing views on the decision to keep interest rates unchanged last Wednesday, with two officials voting in favor of a rate cut, while the remaining nine supported maintaining the current stance. Even among the officials who supported not taking action in July, new divisions emerged—whether to worry more about the labor market or the potential for inflation to rise in the coming months, posing a challenge for Powell in building consensus.
Although the unemployment rate in July only slightly rose to 4.2% (reversing the drop to 4.1% in June), the weak employment data provides space for Powell to garner consensus for a rate cut, as this data undermines the argument that the labor market is maintaining strong momentum. Officials will also see a monthly employment report before the next meeting.
Williams pointed out that the unusually large downward revisions to employment data for May and June "are indeed key information for this report," which is important for "understanding labor supply and demand trends" and the weakening momentum in the labor market. He noted that broader indicators, including job vacancies and initial claims for unemployment benefits, depict an economy still in a state of slow hiring and slow layoffs, which has characterized the past year. "I believe the labor market remains robust," he said.
Cleveland Fed President Beth Hammack agreed with this assessment. In an interview with Bloomberg Television last Friday, she stated that the labor market "still appears to be in a healthy balanced state, but there are some disappointing signs that need close attention." She added that given the reduction in immigration, it is reasonable for employment growth to slow.
White House economic advisor Stephen Miran described last Friday's employment report as "disappointing," but attributed most of the weakness to technical and temporary factors. In an interview, he stated that the downward revision of about 60% in employment data for May and June was due to seasonal adjustment issues. Uncertainty in tariff policy temporarily suppressed hiring, but with the recent trade agreements resolving this issue, employment growth should rebound in the coming months.
Williams stated that job growth is concentrated in sectors such as healthcare, education, and government, partly reflecting a catch-up effect after the pandemic. In the hot labor market of 2021-22, employers paying higher wages fiercely competed for workers, while other employers—especially government agencies, healthcare systems, and schools—"simply could not compete well at all," leading to staff shortages. As the labor market cools, these employers are able to fill positions that could not be filled during the hiring frenzy. Williams was cautious in his response to questions about a potential rate cut in September, reluctant to endorse market expectations—last Friday, the market briefly believed there was an 80% chance of a rate cut in September. "Market participants face the same challenging questions as we policymakers," Williams said, noting that the market's reaction "in direction I think is understandable."
He stated, "The issue we face is not whether we need to maintain a moderately restrictive interest rate policy, but how to fine-tune the level of restriction to gradually shift towards a more neutral stance. Is it time to slightly lower this scale?"
Federal Reserve Governors Bowman and Waller expressed dissent in support of a rate cut during last Wednesday's meeting, and they issued statements before the report was released last Friday, warning that if the Fed does not resume rate cuts initiated last year, labor market conditions will worsen.
Williams indicated that it is natural to have differing opinions given the high uncertainty brought about by a range of changes such as trade, immigration, and fiscal policy. His cautious stance reflects his view that the Federal Reserve still has work to do on inflation. He pointed out that after excluding the volatile food and energy prices, a widely watched indicator "remains significantly above" the Fed's 2% target.
While he noted that expectations of inflation among businesses and consumers have remained low and stable, he pointed out that the Fed still needs to work to ensure this. "It needs to be reinforced or supplemented by policies that keep the economy well balanced," he said.
Williams expects economic growth to slow to around 1% this year, but he predicts that as policy uncertainty and other headwinds fade, along with favorable factors including the U.S.'s dominance in new artificial intelligence technologies, economic growth will rebound in 2026. "I am not particularly worried about an economic contraction or a significant weakening. Economic growth has slowed, but I expect this level of growth to last only a few quarters before rebounding," Williams said.