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

On Thursday, influenced by the continued weakening of the U.S. job market and the contraction of the manufacturing industry, U.S. stocks plummeted collectively.

The number of initial jobless claims in the United States for the week ending July 27 was 249,000, higher than the expected 236,000. Meanwhile, the U.S. July ISM Manufacturing PMI was 46.8, significantly lower than the market's expectation of 48.8 and the previous value of 48.5 in June. The contraction was the largest in eight months, intensifying market concerns about a U.S. economic recession.

The Federal Reserve had just issued a statement on Wednesday saying, "The risks between inflation and unemployment continue to balance, and future actions will be entirely dependent on new data." On Thursday, the U.S. employment and manufacturing data responded to Powell by indicating that the U.S. economy may be weaker than expected.

The risks the Federal Reserve may face

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

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

Furthermore, the market estimates that the Federal Reserve may cut interest rates by 25 basis points at each of the remaining November and December meetings this year, with a year-end target interest rate range of 4.50% to 4.75%, compared to the current range of 5.25% to 5.50%.

This optimistic expectation of interest rate cuts also drove the rise of U.S. stocks and U.S. bonds on Wednesday, and there is a certain risk in investors' optimistic attitude. If something unexpected occurs, such as the unexpectedly strong inflation data at the end of last year, which has been hindering the Federal Reserve's interest rate cuts.

Another greater risk is that the Federal Reserve may react too slowly and fail to respond in time to signs of economic slowdown, and delaying the start of interest rate cuts until September may narrow the Federal Reserve's operational space.Recent data on the American manufacturing industry and labor market has sounded the alarm bells. In recent months, the pace of job growth in the United States has slowed down, with the unemployment rate rising to 4.1% in June, compared to 3.6% in June of the previous year. However, as Powell pointed out on Wednesday, the employment rate is still at a historically low level. He repeatedly described the cooling of the labor market at the press conference as "a process of normalization from an overheated state, rather than a worrying thing." But he also admitted, "I don't want to see the labor market cool down significantly further."

Moreover, some 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 consumers are facing increasing pressure this year.

Analysts have pointed out that since the Federal Reserve does not have interest meetings in August and October, once the labor market data in July and August starts to weaken, it may face a period of deterioration for several months, during which the Federal Reserve will be "powerless to act." Even if the Federal Reserve reacts and cuts interest rates for the first time in September, and then cuts interest rates for the second time in November, it is impossible to immediately stop the economic slowdown, because the implementation of monetary policy has a lag effect on the economy.

Investors should be most worried that if the labor market cools down significantly further, the Federal Reserve may not have enough time to respond adequately. This also explains why the federal interest rate futures market suggests that there may be a possibility of cutting interest rates by 50 basis points in the remaining interest meetings of the Federal Reserve this year. If this happens, the Federal Reserve may regret not starting to cut interest rates in July.