Yelena Shulyatyeva does not see a labor market that is falling off a cliff. What she does see is a labor market that is cooling, not collapsing; a rise in unemployment that is notable but certainly not catastrophic; a significant drop in hours worked alongside
labor shortages in some industries that are keeping wages rising.
So why does the Conference Board’s Senior U.S. economist see the Federal Reserve moving to a more agressive policy easing path?
Yelena speeded up her view of how fast the Fed will cut rates this year, starting at its September meeting, continuing at the October and December meetings, and adding on two next year, after the August employment report “pointed to a significant cooling, almost to…pushing the labor market to the edge…but not collapsing…I think it's… still possible for the Fed to act preemptively and…try to make sure the labor market doesn't fall into that.”
I asked her about a caveat that economists have put on the labor market table: the idea that the steep slowdown in payroll growth is not due to weaker demand for workers but to the big reduction in immigrants that has reduced the supply of labor. She says that in fact the natural rate of employment growth may have fallen from about 200,000 a month nearly to zero! But there is also a cyclical slowdown in demand for labor related to tariffs, and the concern is that this will weaken consumer demand, especially as tariffs boost prices.
So dive in and hear what Yelena has to say about the latest jobs data, and why and how the Fed’s move to a pre-emptive policy to keep unemployment low is the right one to make.
Labor market is cooling not collapsing 00:01:08.700
It's a report that shows the labor market is cooling. It's cooling quite, substantially, but it's not collapsing. So, this is just a line to summarize a very complex report., I would say that it's very interesting that growth in payrolls is cooling, it continues to go down, the 3-month moving average also declining quite substantially. So, that definitely adds to the risks that Chair Powell was talking about at Jackson Hole.
Increase in unemployment not catastropic; drop in hours worked significant 00:01:08.700
I would also say that the increase in the unemployment rate is notable, but it's not catastrophic. It is a tiny increase if you look at the big scheme of things, and that tells you that, you know, there are other structural things happening, behind, and it's not all about a significant slowdown in payrolls. So, I would also say that you see quite a significant decline in hours worked since, you know, two years ago. That tells you that, you know, even though we are losing immigrants in the labor force, we are not making people who are here work harder, or longer hours, that tells you that demand is cooling.
Cooled job market… but labor shortages keeping wage growth alive 00:02:32.920
00:01: But you know, at the same time, supply shortages, labor shortages in certain industries are keeping wage growth alive, and we're still above the, you know, growth rates that would be consistent with a 2% inflation target. Even though it has cooled down over the last months, but it's still running above...
The ‘New Normal’ for Labor force growth has fallen sharply… 00:04:28.300
I think the natural rate of employment < the nonfarm payroll growth that corresponds to the natural rate of unemployment> has slowed significantly, since, you know, the immigration policy changed. So, what we, were saying, I'd say two years ago, a year ago, that the natural rate of employment was probably closer to 200,000. Now. it is quite possible it's as low as zero, you know, in some circumstances. So, we don't know for sure, it's very difficult to estimate in real time, but…
Definitely, you know, today's payroll report shows that unemployment rate really inching higher. and payrolls running below 50K, on a 3-month moving average. That's telling you that something is going on, and actually, that supports this theory of a very low natural employment rate.
So… I would say that it's probably not as simple as that, so there are different things happening behind the scenes. So, yes, the natural rate is lower, and that's a part of the story, but You also see a cyclical slowdown, a slowdown in demand for, you know, in industries that are related to tariff impacts. So, you see, like, manufacturing slowdown, you see that, you know, certain trade industries are also slowing, so that is having an impact, and that is having an impact on demand.
Weaker, weakening demand…room for a policy response 00:06:07.170
Whereas immigration is having quite a significant impact on the supply side of the story. So it's really about how these two balance each other, and I think at the same time, all the data is pointing to significant cooling, almost to, you know, pushing the labor market to the edge. Even so… but not collapsing. So, I think it's… it's still possible for the Fed to act preemptively and, you know, try to make sure the labor market doesn't fall into that. You know, story.
Fed to cut rate in September, October, December and twice in 2026
Okay, so first of all, we are expecting a rate cut in September, and actually the latest data, even if, you know, think the labor market is not collapsing, still, the data opened the door for a more rapid series of, cuts going forward. So we actually expect, the Fed will cut rates in October and December, and twice next year. But we kind of moved forward that, the path for rate cuts, just given how…
Fed to act on pre-emptively on jobs portion of the dual mandate 00:07:51.730
…you know, rapid the slowdown has been in the labor market. So the data may still be consistent with a healthy labor market, but the risks, to the, you know, to the maximum employment mandate, definitely increased quite significantly, as opposed to the inflation side of the mandate. But I think that, you know, the Fed will… will just try to act preemptively, and just try to restore the balance here.
A shift to worry less above inflation 00:09:18.100
Well, inflation will rise, and the question is, like, how persistent it will be. And what we see, based on the labor market data, is that wage inflation is probably not going to become a source of inflation going forward. It's all about tariffs. And in this particular case, tariffs are a tax on the consumer. We have already seen a significant impact on, consumer spending this year, and it's just going get worse. So, go into the holiday season, people will probably cut down on spending, and in real terms, we will see a significant slowdown, which in turn. will, put a cap on how much goods prices will be able to rise.
So, I think that we should probably worry less about the inflation side of the story than, at this point, we should worry about the employment side of the story. And that's… that's the reason, you know, for the… change in the Fed's reaction function, and that's why I think the cuts are more likely not so much because the data, you know, turned so significantly. We knew it was slowing, right? We knew that tariffs will result in a slowdown in the economy. It's just that you know, when you get to the point at which it looks, okay, now we are on the verge of something, the Fed usually would act and save the labor market.
The consumer is still really OK 00:10:57.
The consumer fundamentals are still very much okay. The balance sheets are okay, and it's, like, there are pockets of weakness, there are…concerns about the, consumer ability to, borrow, money, and, you know, particularly among certain categories. And I think overall, the consumer remains in a relatively good, healthy state. And even the labor market, even with today's numbers, I think we're not anywhere near a collapse. Look at the Sahm rule. The Sahm rule is far from being triggered, right? We still, you know, the unemployment rate is still very low relative to low rates over the last 12 months, so I think… That tells you that, you know, it's time to act, but it's not the time to act, because… things are falling apart. It's a very good, you know, well-thought-out move, I think. That's how we're going see it.
Bessent’s critique of Fed Independence 00:13:51.710
What struck me in that piece, actually, and that… the piece starts with that, is his criticism of unconventional monetary policies, which he calls experiments. So, and he refers, to the time of the Great Financial Crisis and the Fed… Fed's response to… to that. So, to me, a part… an essential, an integral part of Fed independence, actually. It's the ability to act during the time of crisis…act, you know, aggressively, quickly, to make sure that you can arrest the negative spiral from what’s happening in the economy. And that, to me, is an integral part, and it should continue to be a part of the Federal Reserve toolkit. An ability to act, under extraordinary circumstances, to the extent that they, you know, deem essential, to save the economy. It's very difficult to say, oh, you know, if…If we didn't do that, the economy would have done this, this, and that. So, yeah, the counterfactual is… you know, could be quite, quite significant, but we don't know what it would have been. But, you know, evidence suggests that it's probably… could have been much, much more difficult. And I think that, again, you know, the ability for the Fed to employ extraordinary tools during the time of crisis is an integral part of its independence.
During crisis the Fed does not act alone 00:16:14.930
Well, at the time of crisis, if we talk about the crisis, right, it always requires a concerted effort from all kinds of different parts of the government. It's not just up to the Fed, it would be… a big part of it would be Treasury, and obviously. the administration, fiscal policy, and, you know, as it was the case during COVID pandemic, a big and, you know, big response from the health… authorities as well. So, like, it depends on the type of a crisis, obviously, but the Fed is not the only player, and, you know, it always takes a combined effort to arrest something like that.
Yelena Shulyatyeva
Senior US Economist
The Conference Board
Yelena Shulyatyeva is a Senior US Economist for The Conference Board Economy, Strategy & Finance Center, where she focuses on analyzing macroeconomic developments in order to better understand the implications for the broader economy and monetary policy. As part of a team of economists, she produces in-depth analysis of macroeconomic data and trends for the community of C-suite executives providing the insights to help companies make effective strategic decisions to accelerate growth.
https://kathleenhays.substack.com/p/shulyatyeva-fed-will-cut-rates-three
