NovaQuant-Chicago Fed's Goolsbee says jobs data weak but not necessarily recessionary

Chicago Federal Reserve President Austan Goolsbee said on NovaQuantMonday that last week’s disappointing jobs report was not necessarily a recessionary sign and that the Federal Reserve’s focus remained on inflation and employment to determine interest rate policy.

Global stock markets plunged after the U.S. Labor Department reported only 114,000 jobs were added in July while the unemployment rate jumped to 4.3%. Both were weaker than economists had predicted and immediately triggered recession fears. Stocks closed lower on Friday, and that selling spilled into overseas trading on Monday, prompting some investors and economists to call for emergency rate action by the Fed to ward off recession.

But Goolsbee hinted that’s not likely.

“The market volatility can be jarring, especially following a period where there's been so much less volatility in the market,” Goolsbee told USA TODAY in an interview. However, “the law gives the Fed two jobs: stabilize prices, maximize employment. That's the dual mandate. That's the thing that will determine what the Fed does on rates. There's nothing in the Fed's mandate that says stop market declines. Or, you know, keep traders whole on days when there's volatility, right?”

What about the weak jobs report?

Goolsbee admitted the jobs report was “negative” but also said “we should not overreact to one month's data report because there's a margin of error on the data.”

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The payroll jobs number has a margin of error of plus or minus 100,000 for a monthly report, making the 114,000 new jobs within the margin of error against forecasts, he said.

Details of the report also showed a murkier picture of the labor market. “The unemployment rate went up more than people thought, but the labor participation rate and the employment to population ratio both rose, which is kind of unusual,” he said. “Normally, the recessionary signs are when the unemployment rate is rising because layoffs are going up.”

Instead, he said “inflation has come down significantly over the last year, and the real side of the economy has weakened, but to levels so far that are still respectable.”

Is it still too soon for a Fed rate cut?

It might be worth considering lowering the fed funds rate, Goolsbee suggested. The fed funds rate has stood at a 23-year high of 5.25-5.5% since July 2023.

“I've been saying for quite a while that the Fed set the rate at the level it is now a year ago, and the conditions were very different a year ago than they are today,” he said. “If you're going to be as restrictive as we are for too long, then you are going to be have to think about the employment side of the mandate, and you only want to be that restrictive if you're afraid of overheating. And my thing is, this is not really what overheating looks like.”

What about Monday’s volatile markets?

Goolsbee said there might be multiple reasons for the market gyrations.

Monday’s sharp market moves feel “like there is a technology story that's going on, and the fact that in Japan, they were raising the rates when the rest of the world is either cutting or contemplating cutting the rates,” he said. “And so, it's having impacts on the exchange rate, which affects carry trades. It does seem like there are, on a global scale, a bunch of complicating factors beyond just the one month job report.”

He added, “the Fed moves in a steady manner and tries to take the totality of the data, and that's not on the timeframe of market reaction. My old mentor was (former Fed Chair) Paul Volcker, who used to always say, our job (as) the central bank..is to act, and their (the market’s) job is to react. Let's not get...the order mixed up. And I agree with that.”

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.