The U.S. economy is worse than expected, is the Federal Reserve lagging behind again this time?

The U.S. economic data has once again poured cold water on the Federal Reserve.

On Thursday, due to the continued softening of the U.S. job market and the contraction of the manufacturing sector, the U.S. stock market collectively plummeted.

In the week ending July 27th, the number of initial jobless claims in the United States was 249,000, higher than the expected 236,000, while the U.S. ISM Manufacturing PMI for July was 46.8, significantly lower than the market's expected 48.8 and the June figure of 48.5, marking the largest contraction in eight months and exacerbating concerns about a U.S. economic recession.

Just on Wednesday, the Federal Reserve issued a statement saying, "The risks between inflation and the unemployment rate continue to trend towards balance, and future actions will depend entirely on new data." Following the U.S. employment and manufacturing data on Thursday, Fed Chair Powell responded that the U.S. economy may be weaker than expected.

Risks the Federal Reserve May Face

One major risk the Federal Reserve faces is that investors may be overly optimistic about the prospect of rate cuts.

According to CME's FedWatch tool, after Wednesday's Federal Reserve interest rate meeting, the federal funds futures currently expect a 100% probability that the Fed will cut rates by at least 25 basis points at the September meeting, including a 15% probability of a 50 basis point cut.

In addition, the market expects the Fed to cut rates by 25 basis points at each of the remaining November and December meetings this year, with the year-end target rate range at 4.50% to 4.75%, compared to the current range of 5.25% to 5.50%.

This optimistic expectation for rate cuts also drove up U.S. stocks and bonds on Wednesday, but investors' optimism carries risks. If any unexpected events occur, such as unexpectedly strong inflation data like at the end of last year, it could hinder the Fed's rate-cutting actions.

Another even greater risk is that the Federal Reserve may react too slowly and fail to respond promptly to signs of economic slowdown, delaying rate cuts until September could narrow the Fed's operating space.

Recent U.S. manufacturing and labor market data have sounded the alarm.

In recent months, the pace of job growth in the U.S. has slowed, with the U.S. unemployment rate rising to 4.1% in June, compared to 3.6% in June last year. However, as Powell pointed out on Wednesday, the employment rate remains at historically low levels. He repeatedly described the cooling of the labor market as "a process of normalization from an overheated state, rather than a cause for concern." But he also admitted, "I don't want to see further significant cooling in the labor market."

Moreover, some situations in this round of U.S. stock earnings reports indicate that the actual economic situation may be worse than what the data shows. McDonald's CEO Chris Kempczinski said on Monday that the pressure on consumers has been increasing this year.

Analysts point out that since the Federal Reserve does not have interest rate meetings in August and October, if the labor market data for July and August start to weaken, there may be a few months of deterioration where the Fed will "do nothing." Even if the Fed responds by cutting rates for the first time in September and then for the second time in November, it will not immediately stop the economic slowdown, as the implementation of monetary policy has lag effects Investors should be most concerned about the possibility that if the labor market cools significantly further, the Federal Reserve may not have enough time to react adequately. This also explains why the federal funds rate futures market suggests that there is a possibility of a 50 basis point rate cut at the remaining Fed meetings this year. If this scenario unfolds, the Fed may regret not starting rate cuts in July