The Federal Reserve should have lowered interest rates at Thursday’s meeting, according to economists reacting to the jobs report released on Friday.

The Fed has kept its key interest rate between 5.25% and 5.5% as it looks for the inflation rate to fall to 2%.

“The economy and the stock market have been resilient because unemployment has stayed low and consumers have kept spending, but if that is no longer the case then the Fed has made a serious error in keeping rates too high for too long,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

The Fed has been counting on the economy to remain resilient and inflation to drop before cutting rates, Zaccarelli said.

The agency was able to do that because the economy stayed strong with high GDP and low unemployment.

“This morning, we have the opposite problem with the labor market softening and unemployment jumping higher,” he added.

The unemployment rate rose 0.2% to 4.3%, or 7.2 million people, in July, according to data released by the U.S. Bureau of Labor Statistics on Friday.

The U.S. economy added 114,000 jobs last month, down from the revised figure of 179,000 jobs in June.

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Wage growth ebbed as average hourly earnings rising by 0.2% in July, down from 0.3% in June and slightly below forecasts.

On an annual basis, average hourly earnings were 3.6% higher compared to June 2023, down from 3.9% in June and below consensus of 3.7%.

The Fed may change what it has been saying about rate cuts before the September meeting to “remove all doubt” of a September rate cut, said Jamie Cox, managing partner for Harris Financial Group.

“The jobs data are signaling substantial further progress that the Federal Reserve made a policy error by not reducing the Fed Funds rate this week,” he said.

The July jobs report showed that macro data on the economy is beginning “to turn in an ominous direction,” said Alex McGrath, chief investment officer for NorthEnd Private Wealth. 

“Once again prior prints were revised lower (I AM SHOCKED, SHOCKED I SAY!) and this week's big miss all but cements a September rate cut and potentially more should this data continue to weaken on the heels of a very weak ISM number yesterday.”

Federal Reserve Chair Jerome Powell communicated Wednesday that a rate cut could arrive at the September meeting if inflation and the labor market perform as expected.

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Image: Federal Reserve