Rate Cuts Might Not Cure What Ails the Job Market
Tariffs, tight credit weigh on hiring plans while some channels for rate relief are clogged
By Justin Lahart and Ruth Simon
The Federal Reserve resumed its interest-rate cutting campaign earlier this month in an effort to reverse a stall in the job market.
The problem: The hiring drought can’t be cured by lower interest rates alone, at least not soon.
Lower rates will help by bolstering demand, especially for interest-sensitive purchases such as houses.
But many businesses say their problem, rather than demand, is a panoply of issues from high costs and tariffs to tight credit.
The usual levers through which lower rates initially boost the economy—rising stock prices and lower mortgage rates—are also less potent than usual.
This helps to explain the “curious kind of balance” that Fed Chair Jerome Powell says characterizes the labor market.
Layoffs have stayed very low, likely because sales are also holding up.
Yet hiring is extremely low as well.
The net result: barely positive job growth.
About a fifth of 523 companies in a quarterly survey of chief financial officers by Duke University and the Federal Reserve Banks of Atlanta and Richmond released this past Wednesday said that they were reducing hiring because of tariffs.
Many said they weren’t filling open positions, while some were laying off workers.
The slowdown cuts across firms of all sizes.
Last week, Starbucks said it was slashing 900 workers because of increasing labor costs and coffee prices, and weaker same-store sales.
Small businesses, with fewer options for coping with costs such as tariffs, appear especially reluctant to hire.
Just over half of 658 small businesses recently surveyed by Vistage Worldwide, a business-coaching and peer-advisory firm, said they expect to increase head count over the next 12 months, up from April but down from 71% in December.
At New York-based POP Creations—a designer and importer of home decor, desktop organizers and storage products under license agreements with companies such as Disney and Marvel—profits are down 30% this year because of tariffs on imports from China and India, said founder Albert Hazan.
The 16-person company has raised prices a bit, but also absorbed most of those costs, with retailers also bearing some.
The tariff squeeze prompted POP Creations to add two employees this year, not the planned four.
Instead of taking on two creative directors in the U.S., it hired them in Brazil to bring costs down.
“Before all of this, it was shaping up to be a really good year,” Hazan said.
“Demand is definitely down because of the pricing, so revenue is down also.”
This month’s rate cut was the Fed’s first since December, and officials signaled two more were likely by the end of this year.
They decided to move because job growth had screeched to a virtual halt in recent months, and unemployment had edged up.
But unless the job picture gets much worse, rate relief will be limited because inflation is still stuck above the Fed’s 2% target.
Moreover, interest-rate changes work with a lag.
Michael Ervin, co-owner of Ethereal Confections, a 30-person craft chocolatier in Woodstock, Ill., said the rate cut came too late to affect his staffing plans.
The 14-year-old company, which roasts and grinds its own beans, laid off 20% of its workforce last year after ingredient and labor costs climbed and its local bank was acquired.
The new bank replaced Ethereal’s line of credit with a fixed-rate term loan.
Ethereal’s debt load also increased after the government forgave only a portion of its pandemic loan.
The Fed’s actions won’t make a difference unless they affect the cost of ingredients—which have jumped in response to tariffs—or of labor, or unless rates drop enough for Ethereal to refinance, said Ervin, who runs a retail shop, a wholesale business and an event space.
“We had to raise prices significantly to respond to inflation and losing access to credit,” said Ervin.
Lower rates help the economy by boosting risky assets, such as stocks and corporate bonds, making it easier for large companies to obtain financing, invest and hire.
But financial markets were already riding high, providing less incremental boost.
“It’s very hard to make the case that high interest rates are a binding constraint for corporate America,” said Robert Barbera, director of the Johns Hopkins University Center for Financial Economics.
Small businesses that don’t access the stock and bond markets are more sensitive to bank credit.
Robert Rodriguez, CEO of NC Digy, said the Miami-based, 46-person provider of municipal and e-commerce digital technologies frequently walks away from business opportunities because financing isn’t available for the company or its customers.
“Capital access is harder than ever,” he said.
“Rate cuts aren’t enough.”
A survey by the Federal Reserve Banks found that 52% of small-business applicants (with small business meaning an “employer firm”—a business with at least one employee in addition to the owner) were approved for all the financing they asked for in 2024, down from 62% in 2019.
That said, rate cuts will, at the margin, help.
Holly Byrd Miller, CEO and founder of Makeup By Holly Beauty Partners, said they make her more comfortable boosting the credit line to $150,000 from $50,000.
The Richmond, Va.-based provider of styling, video and photo services for executives and professionals will need to add a couple employees to its current 45 to launch a new cosmetics line.
“A quarter point is nice,” Miller said. “A bigger rate cut, in my case, would be nicer.”
Fed rate cuts tend to help interest-sensitive purchases first, in particular housing, which can then boost related purchases, such as appliances.
Some homeowners can refinance at lower rates.
The resulting boost to spending can then lead to more hiring.
Residential sales have been depressed this year because lofty home prices and stubborn mortgage rates have hurt affordability.
Andrew Pearson Glass, a family-run maker of custom glass table and countertops in Mount Airy, N.C., currently has about 24 employees, down from 30 in 2022.
If the Fed goes ahead with two additional rate cuts, mortgage rates should fall and home sales will likely improve, said Andrew Brownfield, the company’s chief executive.
Then he could offer current workers more overtime or bring on additional ones.
Brownfield is optimistic that tariffs will be good for his business, though he hasn’t seen added orders yet.
“We are finding that we are very price competitive now,” he said.
Mortgage rates move with long-term Treasury yields rather than the Fed’s short-term rate target, and those yields have stabilized above 4% despite the prospect of more rate cuts.
Mortgage rates are still well above what most homeowners currently pay, which makes them reluctant to move and unable to refinance.
“It’s enough where you’ll save money if you refi, but it’s not that much,” said Richard Koss, head of research at mortgage analytics firm Recursion.
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