Fed’s fear meter may be pointing to stagnation, rather than stagflation

Federal Reserve officials, already expected to cut interest rates next week, may also be closer to settling a months-long debate over the risks of stagflation after recent data showed longstanding weakness in hiring and easing inflation concerns.

The shift in tone began this summer, led by dissents in July from two Fed governors who wanted to cut rates at that time based on risks to the job market, and continuing as other officials began downplaying inflation and focusing more on an economy that was slowing and at risk of shedding jobs.

As the US central bank's September 16-17 meeting nears, the latest batch of data shows the unemployment rate rose in August to 4.3 percent and the economy actually lost jobs in June following a revision. Had that data been available in the initial June estimates, it could have influenced the Fed's decision on July 30 to hold its benchmark interest rate steady in the 4.25 percent-4.50 percent range, where it has been since December.

In addition, a benchmark revision of employment this week indicated nearly a million fewer jobs were added in the year through March than originally reported.

Consumer prices in August did rise faster than in the prior month, but initial jobless benefits claims jumped in the latest week, in another sign of labor market cooling.

The situation resembles last summer when slowed hiring and downward revisions to prior estimates prompted a half-percentage-point rate cut at the Fed's meeting that September. While market analysts, including 105 of 107 economists in a recent Reuters poll, expect only a quarter-percentage-point cut next week, the latest data could lead officials to project a quicker and steadier drop in rates as they move from guarding against inflation to defending the job market.