Employers Need Certainty Around Tariffs, Not Lower Rates

The U.S. added just 22,000 jobs to payrolls in August. Above, job seekers in Buffalo, N.Y. (Lauren Petracca/Bloomberg)

Lower interest rates may give markets a sugar rush, but don’t expect a major boost to employment conditions.

U.S. employers added just 22,000 jobs to payrolls in August, according to the latest data from the Bureau of Labor Statistics, published on Friday. An update to the June tally showed that the economy lost 13,000 jobs that month, bringing the three-month moving average to just 29,000 job gains.

That weak pace of job growth all but locks in a quarter percentage point rate cut at the Sept. 16-17 meeting of the Federal Open Market Committee, putting the bank’s target for the federal-funds rate at 4% to 4.25%.

But the irony is that while a stalling labor market will be used to justify a cut, a lower fed-funds target rate is unlikely to boost hiring or materially improve employment conditions. For that, businesses will need certainty and stability around trade policy. And with tariff policy back in limbo after a federal appeals court recently struck down President Donald Trump’s use of emergency powers, it could be a while before companies get any clarity.

“We’re back in that world of uncertainty and when that happens, things freeze up, corporates don’t make decisions, investors get uncertain, and consumers start changing their behavior—and none of that’s going to drive job creation,” Art Hogan, chief market strategist at B. Riley Wealth, tells Barron’s.

In fact, companies can tap into credit if they need to fund human capital investments. “Financial conditions as measured by the Fed have eased, while the senior loan officer survey was not notably restrictive,” says Diane Swonk, chief economist at KPMG.

Instead, uncertainty levels its own “tax” on the economy, Swonk says. Businesses are struggling to determine how fluctuating tariff policies will impact their bottom line and consumer demand, both factors that primarily drive hiring decisions. In the Federal Reserve’s latest beige book published on Wednesday, for example, the word “tariff” appeared 100 times in discussions of business and economic activity, up from 75 in the prior report.

Moreover, employment in both manufacturing and wholesale trade fell by about 12,000 in August, sectors vulnerable to the impact of tariffs. The manufacturing sector has lost about 42,000 jobs since Apri l, when Trump announced his aggressive slate of so-called Liberation Day tariffs.

“People aren’t saying the weight cost of capital is too high to invest, we can’t do anything, we can’t hire. No, it’s this uncertainty overhang and it hasn’t gone away,” says Izaac Brook, U.S. rates strategy analyst at RBC Capital Markets. In more normal conditions, reducing rates should help stimulate the economy. Now that may help at the margins, says Brook, but it’s certainly not the “big problem” that needs to be solved right now.

The problem, to some extent, is that rate policy is a blunt tool in a situation where precision is called for—and there’s no guarantee that a lower benchmark rate will prove stimulative. It didn’t last time the Fed lowered rates by a full percentage point at the end of 2024.

“The last time the Fed lowered rates, the long end [of the yield curve] went up, and there’s a potential that can happen again,” Hogan says. An increase in long-term yields means interest rates on consumer products like credit cards, auto loans, and long-term fixed mortgages tend to tick up as well, while business borrowing costs are also higher.

“Cutting rates sounds good on paper, but the market is going to have to wake up to the fact that there’s a difference between trying to normalize rates when you feel that you’re too restrictive and thinking that you need to come to the rescue of something,” Hogan says.

Write to Megan Leonhardt at megan.leonhardt@barrons.com