Fed Officials Take Cool Jobs Report in Stride

New York Fed President John Williams

July’s jobs report rattled financial markets and meaningfully raised the prospect that the Federal Reserve will cut interest rates at its next meeting in September.

But two Fed officials on Friday maintained that the U.S. labor market is still well balanced, describing the latest softness as part of a gradual cooling rather than a worrying deterioration.

In an interview Friday, New York Fed President John Williams said he would go into the September meeting with “very much an open mind” about cutting interest rates. But he also offered a more measured assessment that tempered the sense of urgency driving expectations for more aggressive easing.

“What we’re seeing I would describe over the past year as a gentle gradual cooling of the labor market, but still leaving it in a still solid place,” said Williams, a top ally of Fed Chair Jerome Powell.

Fed officials were split over their decision to hold rates steady at their meeting on Wednesday, with two officials voting in favor of a cut. Nine others supported the decision to hold steady.

Even among those who favored taking no action in July, a divide is emerging over whether to worry more about the labor market or the prospect for firmer inflation in the months ahead, creating a challenge for Powell in forging a consensus going forward.

Stephen Miran, chairman of the Council of Economic Advisers

While the unemployment rate rose only modestly in July to 4.2%, reversing a decline to 4.1% in June, soggier payroll figures give Powell room to build agreement for a rate decrease because they undercut a narrative that the labor market has strong momentum. Officials will see one more month of job data before their next meeting.

Unusually large downward revisions to job gains in May and June had been “really the news of this report,” said Williams. “This is important information…to understand the direction of what we’re seeing in supply and demand for labor” and the labor market’s cooler momentum.

A wider range of indicators, including job openings and initial claims for jobless benefits, paint a picture of an economy that remains in the same slow-to-hire, slow-to-fire equilibrium that’s been a feature for the past year, Williams said. “The labor market still is solid in my view,” he said.

Cleveland Fed President Beth Hammack echoed that assessment. In an interview Friday with Bloomberg Television, she said the labor market “looks like a healthy labor market that’s still well in balance, but with some disappointing signs that we should watch very carefully.” She added that weaker job growth makes sense given reduced immigration.

White House economic adviser Stephen Miran said Friday’s jobs report was “a disappointment” but attributed much of the weakness to technical and temporary factors.

Beth Hammack, president of the Federal Reserve Bank of Cleveland

In an interview, he said about 60% of the downward revisions to May and June job gains were due to seasonal adjustment issues. Policy uncertainty around tariffs had temporarily weighed on hiring, but its resolution with recently announced trade deals should allow job growth to rebound in coming months, he said.

Williams said the concentration of job gains in certain sectors like healthcare, education and government partly reflects a catch-up dynamic from the pandemic era. During the hot labor market of 2021-22, employers who could afford to pay higher salaries competed aggressively for workers, while others—particularly government agencies, healthcare systems and schools—“just didn’t have the ability to compete as well” and ran understaffed.

As the labor market has cooled, those employers have been able to fill positions they couldn’t during the hiring frenzy, he said.

Williams answered questions about a possible September cut cautiously, declining to defend market expectations that at one point on Friday placed an 80% probability on a September rate cut.

“Market participants are confronted with the same challenging questions that we are as policymakers,” Williams said. Markets are “responding to signals in ways that directionally…I think are understandable.”

John Williams and Jerome Powell in 2018

“The question ahead of us is not whether we need” to maintain a modestly restrictive interest-rate policy, but rather about fine-tuning the level of restriction, he said, as it moves gradually to a more neutral stance. “Is it time to turn that dial down a little bit?” he said.

Fed governors Michelle Bowman and Christopher Waller, who dissented in favor of a rate cut at Wednesday’s meeting, issued statements before Friday’s report warning of weaker labor market conditions if the central bank didn’t resume the rate cuts it began last year.

Williams said it was natural to have divided views, given elevated uncertainty over a range of changes on trade, immigration and fiscal policy.

Williams’s measured approach reflects his view that the Fed still has work to do on inflation. He noted that a widely watched gauge that excludes volatile food and energy prices is “still meaningfully above” the Fed’s 2% target.

While he said businesses’ and consumers’ expectations of inflation had been holding at low and stable levels, he said the Fed still had an important job to do in making sure that remained true. “It needs to be reinforced or complemented with policies that keep the economy in good balance,” he said.

Williams expects economic growth to slow to around 1% this year but said he expects growth to rebound in 2026 as policy uncertainty and other headwinds fade and as tailwinds develop, including America’s dominant position on new artificial-intelligence technology.

“I’m not…particularly worried right now about the economy contracting or really weakening a lot,” Williams said. “It has slowed, but I expect it to just be at this pace of growth for a couple quarters and then come back.”