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

On Thursday, affected by the continuous softening of the US job market and the shrinkage of manufacturing, US stocks collectively plummeted.

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

Just a day after the Federal Reserve issued a statement on Wednesday stating that "risks between inflation and unemployment rates continue to tend toward balance, and future actions will depend entirely on new data", US job and manufacturing data on Thursday responded to Powell's statement: The US economy may be weaker than expected.

Risks the Federal Reserve may face

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

According to CME's FedWatch tool, the probability that the Federal Fund futures will drop at least 25 basis points at the September meeting is 100% after the Federal Reserve meeting on Wednesday, including a 15% chance of a 50 basis point cut.

In addition, the market expects the Federal Reserve to cut interest rates by 25 basis points at the remaining November and December meetings this year, with the year-end target interest rate range at 4.50%~4.75%, compared to the current range of 5.25%~5.5%.

This optimistic expectation about rate cuts has also driven up US stocks and bonds on Wednesday. However, investors' optimistic attitude carries some risks. Once something unexpected happens, such as unexpectedly strong inflation data at the end of last year, which has hindered the Fed's actions to cut rates, it may be dangerous.

Another greater risk is that the Federal Reserve may react too slowly and fail to respond in time to signs of economic slowdown, and postponing rate cuts until September may shrink the Fed's operating space.

Recent US manufacturing and labor market data have sounded the alarm.

In recent months, the pace of US employment growth has slowed down, with a June unemployment rate of 4.1%, up from 3.6% in June last year. But as Powell pointed out on Wednesday, the employment rate is still at a low level in historical standards. He described the cooldown in the labor market at the press conference multiple times as "a process of normalization from overheating, not something to worry about." But he also acknowledged, "I don't want to see a significant further cooldown in the labor market."

Moreover, some of the situations in this round of US stock earnings season indicate that the actual economic situation may be worse than the data shows. McDonald's CEO Chris Kempczinski said on Monday that the pressure on consumers has continued to increase this year.

Analysts pointed out that since the Federal Reserve has no interest rate meetings in August and October, if the labor market data in July and August begin to weaken, there may be a period of deterioration for several months during which the Federal Reserve will "do nothing". Even if the Federal Reserve responds by cutting rates for the first time in September and then cutting rates for the second time in November, it cannot immediately stop the economic slowdown, because the implementation of monetary policy has a lag effect on the economy.

Investors' biggest concern is that if the labor market significantly cools down, the Federal Reserve may not have enough time to respond fully. This also explains why the federal funds rate futures market suggests that there may be a 50 basis point rate cut at the remaining Federal Reserve meetings this year. If this happens, the Federal Reserve may regret not cutting rates in July.

Editor/Somer