Large corporations send a signal to the Federal Reserve: either cut interest rates or lay off employees!

When the Federal Reserve sent a signal to investors about the future path of monetary policy this week, it can no longer turn a deaf ear to the labor market conditions.

For months, Federal Reserve officials have been emphasizing that the flexibility of employment data proves that rate cuts are not urgent. However, during this earnings season, U.S. companies sensitive to interest rates have sent a clear message: demand is declining, and the main factor preventing layoffs is the confidence that rate cuts will start soon and bring brighter prospects for 2025.

Now, what the Federal Reserve needs to implement is not just a rate cut, but a series of rate cut measures to maintain business confidence and ensure that the labor market does not deteriorate further.

According to foreign media data, in about one-third of the cases during the second quarter earnings season, the proportion of companies exceeding revenue expectations is the lowest since 2019. The economic slowdown is particularly evident in areas related to household borrowing and consumer credit. Tight budgets have led to a bleak quarter for the automotive industry, with increased inventory putting downward pressure on prices, squeezing profit margins.

Similarly, home sales in June returned to the lowest level in nearly a decade, which is bad news for businesses relying on home sales volume, such as Maytag's owner Whirlpool Corp., which stated that the expected recovery by 2024 will not happen.

The situation in these consumer-facing industries has led to a continuous rise in the unemployment rate, reaching the highest point in over two years last month. While nominal real Gross Domestic Product (GDP) data still looks robust, such an environment could quickly spiral out of control. For example, in the fourth quarter of 2007, the U.S. real GDP grew by 2.5%, but the U.S. economy then fell into recession.

The views of many hard-hit companies indicate that if the Federal Reserve acts promptly, the United States will not experience the kind of downward spiral in the labor market that it did during the financial crisis. Whirlpool stated in its earnings conference call that the company will benefit once rate cuts alleviate pressure on the housing market. Leisure boat manufacturer Brunswick Corp. pointed out that a series of potential rate cuts starting in September will have a positive impact next year. Pool Corp., a distributor of swimming pool supplies, stated that orders have not yet rebounded, but increased inquiries indicate that customers are just waiting for confirmation of a decrease in borrowing costs before making decisions.

If the Federal Reserve is comforted by the relatively stable layoff situation and delays the start of rate cuts, it would be a mistake - layoffs have not occurred because companies believe that policy easing favorable to them is imminent, and companies plan based on rate cut expectations, just as the Federal Reserve formulates policy based on economic data.

Fortunately, the economic situation still seems favorable for the Federal Reserve to prevent the negative economic outcomes that policymakers hope to avoid, but they should not misinterpret the resilience of economic data on the surface. Companies are increasingly relying on lower borrowing costs to maintain layoffs, so the Federal Reserve is best advised to signal this week that it is ready to intervene. **