Monday’s unemployment data will be crucial for the Federal Reserve to decide whether or not to increase interest rates again in September.
Markets brace as the September Federal Reserve meeting gets closer. July’s optimism, when markets hoped rate hikes were at an end, is fading away as Fed’s president Jerome Powell hinted at more raises incoming.
Nothing is certain yet, except that rate hikes remain on the table. US interest rates are now at a 22-year-old high of 5.5% in the quickest monetary tightening policy in American history.
Since March 2022, the Fed skipped rate hikes only once in June 2023. Back then, American banks and small businesses were struggling to stay afloat amidst higher borrowing rates. Start-ups started to collapse at a worrying pace as well as major banks.
Even in June, however, Powell made no secret that it was just a temporary pause. Inflation remained high, way higher than the 2% target, and had to be tamed.
Lo and behold, in July Powell raised interest rates again. At the same time, the American economy seemed to be back on its feet. Gross Domestic Product in the second quarter was better than expected and unemployment continued its downward slope.
Indeed, the United States seemed to be the best-performing developed economy, with China’s deflation finally becoming official and European inflation still too high for comfort.
But one thing remains in the mind of American markets and economists: recession.
Unemployment and recession risks
In September, Jerome Powell will have no GDP data to work with. To understand the state of the US economy he’ll mainly have unemployment levels.
So far this year, the US job market appeared incredibly resilient. The “replacement level” to accommodate new people entering employment age is 70,000-100,000 new jobs created every month.
In June, the US economy created 185,000 new jobs, growing to 187,000 in July. Unemployment is at historic lows, dropping to 3.5% last month.
On Monday, fresh job market data will be released for the month of August. Experts forecast another positive month, with stable new entries in the job market.
If that really happens, the Fed will have one more reason to continue hiking. The final piece of data needed will be August inflationary levels. If headline and core inflation still struggle to come down (it was the case in July too), paired with further economic resilience, the Fed will most likely bring interest rates up again.
“We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” Powell said at Friday’s Jackson Hole meeting.
He also stated the Fed wishes to do no harm to the economy. They will try to avoid recession as much as possible, hence why unemployment data will be so important to assess the current situation.
