Can Rate Cuts Really Save the Job Market?

Earlier this month, the Federal Reserve initiated a rate-cutting cycle, aiming to jumpstart a sluggish job market. But the core question remains: can the “hiring shortage” be resolved solely through interest rate reductions? The answer is complex, and in the short term, at least, it appears unlikely. While rate cuts can stimulate demand, particularly in interest-sensitive sectors like housing, many businesses report that their issues stem not from a lack of demand but from high costs, tariff pressures, tighter credit conditions, and a host of other challenges. Moreover, the two primary drivers that typically propel the economy in the early stages of rate cuts—rising stock prices and declining mortgage rates—are proving less potent than in the past. This explains what Fed Chairman Jerome Powell has termed the “peculiar equilibrium” in the job market: layoff rates remain consistently low (possibly due to stable sales), but hiring activity is also remarkably subdued. The net result is near-stagnant job growth.

The Tariff Effect on Hiring

A quarterly CFO survey released last Wednesday by Duke University and the Atlanta and Richmond Federal Reserves, encompassing 523 firms, revealed that approximately one-fifth of respondents are reducing hiring due to tariff pressures. Some firms have paused filling open positions, while others have already begun layoffs. This hiring slowdown is affecting businesses of all sizes. Starbucks, for example, previously announced 900 layoffs, citing rising labor costs, increased coffee prices, and sluggish same-store sales.

Small Businesses Under Pressure

Small businesses have fewer resources to absorb cost pressures like tariffs, so their willingness to hire is particularly depressed. A recent Vistage Worldwide survey of 658 small businesses showed that just over half plan to increase hiring in the next 12 months (though higher than April's level, it's below December's 71%). Albert Hazan, founder of New York-based POP Creations, says his company's profits are down 30% this year due to U.S.-China and U.S.-India tariffs. The company, which is licensed by firms like Disney and Marvel, designs and imports home décor and desk organization products. Although this 16-employee firm has slightly raised prices, it’s still absorbing most of the costs itself, with retailers also sharing some of the burden. Under tariff pressure, POP Creations has only added two new employees this year, far fewer than its original plan of four. It had also planned to hire two creative directors in the U.S., but ultimately shifted to hiring in Brazil to reduce costs.

Limits to the Effectiveness of Rate Cuts

This month's rate cut is the Fed's first since last December, and officials have signaled that they may cut rates twice more before year-end. The primary reason for the Fed’s decision to cut rates is that job growth has nearly stalled in recent months, and the unemployment rate has ticked up slightly. However, unless employment conditions deteriorate significantly, the Fed’s rate-cutting power will remain limited, given that inflation remains above the Fed’s 2% target. Furthermore, there is a time lag in the impact of interest rate adjustments on the economy. Michael Ervin, co-owner of Ethereal Confections, a Woodstock, Illinois-based handcrafted chocolate business (with 30 employees), says the rate cut came too late to affect his company's hiring plans.

Small Businesses Face Unique Challenges

Small businesses face unique challenges in accessing financing. A Fed survey revealed that only 52% of small business applicants (here, “small business” means “employer firms,” i.e., those with at least one employee besides the owner) received the full amount of financing they sought in 2024, down from 62% in 2019. Despite this, rate cuts still help on the margins. Holly Byrd Miller, CEO and founder of Makeup By Holly Beauty Partners, a beauty services business, said the rate cut made her more willing to increase her line of credit from $50,000 to $150,000.

Limited Impact on the Housing Market

Fed rate cuts typically first stimulate interest-sensitive consumer spending sectors, especially the housing market, thereby stimulating related spending such as home appliances. Some homeowners can alleviate burdens by refinancing at lower interest rates, after which improved consumption will drive companies to expand hiring. U.S. home sales have been weak this year due to high home prices and elevated mortgage rates, which have weakened home-buying affordability. Andrew Pearson Glass, a Mount Airy, North Carolina-based family business that makes custom glass dining tables and countertops, currently has 24 employees, down from 30 in 2022. While Andrew Brownfield, the company's CEO, hasn't seen order growth, he remains optimistic that tariffs are beneficial to business: “We are finding that we are very price competitive right now.” Mortgage rates move with long-term Treasury yields, rather than the Fed's short-term interest rate target—and despite expectations of rate cuts, long-term Treasury yields remain stable above 4%. Current mortgage rates are still well above the existing rates of most homeowners, making homeowners reluctant to move and also unable to alleviate burdens through refinancing. “Refinancing can certainly save money, but the amount that is being saved is not that significant,” said Richard Koss, head of research at mortgage analytics firm Recursion.