Last week’s weaker job report has rang an alarm bell in the US financial market. The economy added 114,000 jobs in July. It is still a growth in employment but much lower than the strong average monthly growth of 250,000 to 300,000 in the past two years. Unemployment rate has risen from 3.6% to 4.3%. Investors are fearing a possible recession meaning a contraction in the economy instead of growth with resulting layoffs. The stock market reacted last week with Dow Jones down by over 1,000 points. The question in the minds of the investors and economists is whether it is a temporary blip or a continued slide?

So what happened? Coming out of the pandemic, the US government injected massive amounts of stimulus money into the economy to create jobs that were lost during the COVID crisis. This stimulus along with supply chain challenges of the pandemic as well as alleged price gouging by the big companies as evidenced by their higher profits created an exceptionally high level of inflation for almost two years. The Federal Reserve Bank plays the critical role of balancing between unemployment and inflation by way of adjusting the interest rates up or down thereby adjusting the consumer demand in the economy. So the Federal Reserve has maintained an intense focus on bringing down inflation in the last couple of years by raising the interest rate to a twenty year high. Mortgage rates have sky rocketed making home buying unaffordable for many. Nevertheless, Fed’s tightening has worked and inflation has recently come down from the high of 7.1% two years ago to a more reasonable level of 2.4% in June. With the unemployment level rising, the question now is if the Fed has gone too far with their balancing act and left the interest rate too high for too long.

So where do we go from here? The Fed has been saying all along that they will start to lower the interest rate once they feel inflation is under control. In fact they hinted last week, before the latest jobs report came out, that they will start lowering the rate in September. The big question is how much should the reduction be – a quarter percent, a half precent or a full percent – in order to avoid a crash landing of the economy. No one really knows what the right answer is. And, also what the ‘neutral’ interest rate is to achieve the best balance between inflation and unemployment. There will be considerable debate and discussion on the reduction path – how much and how often. Some economists feel the Fed has gone too long and a recession is already in the making. So they need to hurry up. Some others don’t agree with that notion. And, most importantly, how this plays out in the next several months will bound to have significant influence on the upcoming Presidential election. I certainly will be watching this important play very intently.

Nirmalya Chatterjee has been a senior executive of several Fortune 500 companies. He was the Chairman of the Hindu Temple of Las Vegas. He is currently the Chief Financial Officer of a Las Vegas based company.

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