We’re at risk of a big problem with jobs unless the Federal Reserve acts fast. Millions of Americans might lose their jobs if things don’t change soon.

During the first three years after the pandemic, the job market was one of the bright spots in America’s strong economic growth.

But now, there are signs that things are slowing down.

Whether you look at hard numbers like the unemployment rate or surveys of businesses, it’s clear that the job market is cooling off.

This slowdown is worrisome because once unemployment starts to go up, it tends to keep going up unless something stops it.

If nothing is done soon, we could see even more people out of work. The Federal Reserve needs to step in to help slow down this slide in the job market.

What the Fed decides to do next will have a big impact on whether we can avoid a bigger increase in unemployment. For the past few years, the Fed has been increasing interst and prices.

But now that inflation seems to be under control, the focus needs to shift to helping the job market.

Waiting too long to lower interest rates to support the economy will only increase the chances of more people losing their jobs.

In short: The Fed needs to move quickly and cut interest rates.

The Job Market at a Turning Point

The U.S. started recovering from the worst of the pandemic shutdowns in early 2020, which led to a historic boom in jobs.

From April 2020 to April 2023, the economy added 25 million jobs—that’s an average of 674,000 new jobs every month. Unemployment even hit a 54-year low of 3.4% in April 2023, and hiring was booming.

This strong job market also boosted wages, especially in lower-end service jobs like retail and hospitality.

But in the past year, things have changed. In the first half of 2024, the unemployment rate went up by 0.4 percentage points to 4.1%.

That might not sound like much, but it means 1.1 million more Americans are out of work compared to April 2023, and about 550,000 lost their jobs just this year.

Importantly, the unemployment rate is now back to where it was before the pandemic disruptions in early 2018.

Other signs show it’s getting tougher for people looking for work. Job openings, which show how much businesses need workers, have gone down.

Even people who have jobs are more worried about their futures.

The rate at which people are quitting their jobs in the private sector is lower now than it was at the start of the pandemic, after peaking in late 2021 to early 2022.

These problems in the job market are happening at the same time as other economic issues. Real GDP (the total value of goods and services produced) grew by only 1.2% in the first quarter of this year.

The Atlanta Fed’s GDPNow model predicts that the second quarter will be about 1.5%.

This means the economy’s growth in the first half of the year is slower than what the Fed thinks is possible in the long term.

The outlook for the rest of the year isn’t great either.

After doing well recently, the construction of new homes is slowing down because fewer building permits are being issued. A slowdown in home building can hurt GDP growth.

Also, people aren’t spending as much as they used to.

Retail sales and food services have been about the same for the past five months because people are cutting back on spending.

This slower economic growth is a problem because even though the economy grew by 3.1% last year, the unemployment rate still went up by 0.2 percentage points to 3.7%. When the economy grows, jobs usually follow.

If 3% growth couldn’t keep unemployment from going up in 2023, why would it stay the same in 2024 if growth is even slower?

As the economy slows down, the job market will get worse.

Once things start moving in one direction, they usually speed up and are hard to turn around. For example, the Beveridge Curve shows how job openings and unemployment are related.

When unemployment is low, job openings can go down a lot without causing more unemployment.

But as unemployment goes up, the number of job openings goes down faster. After the pandemic, people thought that the strong job market meant job openings could go down without making unemployment worse.

But now, after three years of changes, we’re at a point where fewer job openings could lead to more unemployment.

Even a small increase in unemployment will have real effects. The Fed needs to balance keeping people employed with keeping inflation low.

If more people are out of work and looking for jobs, they might accept lower wages, which can keep prices from going up.

This means the Fed doesn’t need to keep interest rates as high.

There’s a way to stop this from happening. The best way to avoid more people losing their jobs is for the Federal Reserve to act now. The Fed’s job is to help as many people get jobs as possible while also stopping prices from going up too fast.

For the past three years, the Fed focused more on stopping prices from going up.

But now that prices are going up slower, it’s time to focus more on helping people find jobs. Waiting too long to start cutting interest rates could make the job market even weaker.

It’s better for the Fed to start changing policy now, before things get worse.

The economy isn’t certain right now, and it’s helpful for the Fed to use rules like the Taylor rule to decide what to do next. The Taylor rule says where interest rates should be based on the unemployment rate and inflation.

With today’s data, the rule says interest rates should be between 4.5% and 4.75%, which means the Fed should cut rates by a quarter of a percent three or four times.

But instead of planning to cut rates soon, the Fed has been slow to act.

Whether it’s the heads of regional banks or Chair Jerome Powell, the Fed has said it needs to see more proof that inflation is going down before it cuts rates.

Some people at the Fed worry that cutting rates now could bring back the high inflation of the 1970s, when rates were cut too soon.

But that’s not likely now. Inflation takes time to show up, and the Fed hasn’t changed what it’s doing, so inflation is still going up.

Even if cutting rates a little now turns out to be a mistake, it’s a small one that the Fed can fix quickly.

As Powell said, figuring out how much one quarter-percent rate cut means for the US economy would be hard. So why not get started now?

No one says the Fed should cut rates a lot now, but it makes sense to change things based on how the economy has been doing. It’s better to do a little now than to have to do more later.

Key Data Points	Details
Unemployment Trends	– Unemployment rate: Increased from 3.4% (April 2023) to 4.1% (early 2024), adding 1.1 million unemployed Americans.
Economic Growth	– GDP Growth: First-quarter growth at 1.2%, projected second-quarter growth at 1.5%.
Job Market Concerns	– Job Openings: Declining, indicating reduced labor demand. <br> – Quit Rate: Lower than peak, indicating reduced job market confidence.
Fed’s Response	– Interest Rates: Fed previously raised rates to combat inflation. <br> – Current Need: Calls for rate cuts to support slowing economy and job market.
Inflation Trends	– Core PCE Price Index: Running at approximately 2.5%, showing signs of cooling.
Policy Debate	– Fed’s Approach: Criticized for potentially waiting too long to adjust rates amid changing economic conditions. <br> – Potential Risks: Balancing employment and inflation.