Jobs data is already 'fraying' and the Fed is about to make a mistake by hiking rates again, economist says

• The US job market is already "fraying," according to Pantheon chief economist Ian Shepherdson.
• That means the Fed continuing to hike rates could be a mistake, Shepherdson warned.
• "The Fed ought to take the whole summer off, but the scares from the 'transitory' inflation fiasco means that they won't unfortunately."

The labor market is already starting to fray, and the Federal Reserve is about to make a mistake by hiking rates one more time, according to Pantheon's chief economist Ian Shepherdson.

Markets are pricing in a 92% chance central bankers will raise rates another 25 basis points at their July policy meeting, per the CME FedWatch tool.

But in a note on Monday, Shepherdson pointed to warning signs that show the tight employment market beginning to break down. Payrolls have been on the downtrend for much of the last year, and the number of small businesses intending to hire have decreased in nearly every National Federation of Independent Business survey since late 2021. 

And though the unemployment rate held steady at 3.6% last month, the number of unemployed people who were able to find a job within five weeks has decreased sharply since the start of the year, while the unemployment rate for African Americans has risen sharply.

"Stepping back from the details of the jobs numbers, which are subject to potentially large revisions, the key message from the revised data is that the trend is still slowing, relentlessly," Shepherdson said. 

That suggests another rate hike will be a "mistake" on the Fed's behalf, he warned, adding that opposition within the Fed to an additional increase in September will build after summer data comes out.

A key threshold will be when payroll gains drop below 100,000 a month and the unemployment rates ticks higher, he said.

"The unemployment numbers are now fraying at the edges … The Fed ought to take the whole summer off, but the scares from the 'transitory' inflation fiasco means that they won't unfortunately," Shepherdson added.

Fed officials have raised interest rates aggressively over the past year to lower inflation, with rates now at their highest level since 2007. That could easily overtighten the economy into a recession, experts warn, especially since the full impact of rate hikes could take months to fully materialize in the economy.

Still, Fed officials have cited stubborn inflation pressures and a consistently strong labor market to suggest tighter monetary policy was ahead.

In June, 12 out of 18 of the Fed's policymakers expected rates to reach 5.5%-5.75% at their peak, implying another 50-basis-point increase from current levels.