There is no question the Fed will cut interest rates in September. What markets are wondering is whether it will be large enough.
The latest job report coming from the United States sets the Federal Reserve for a rate cut in September. The only question remains how large it will be, and whether it will be the last one this year.
As inflation steadily declines, coming down to 2.9% in July, the Fed now focuses on the health of the job market in the United States. For the past few months, fewer people landed a job in the US, with demands for unemployment benefits rising. Unemployment also ticked slightly higher from last year’s all-time low of 3.7%.
The US added a decent 142,000 jobs in August, up from 89,000 in July and 86,000 in June. Economists argued that the summer season skewed the July and June reports.
Unemployment in August declined for the first time in months, faring at 4.2% compared to July’s 4.3%.
“The bottom isn’t falling out, and we’re not seeing a rocket ship,” Becky Frankiewicz, North American president of the staffing firm ManpowerGroup, said. “It’s stability”.
More specific data points to a weakening job market, with US workers in a worse position now than last year. Employers are hiring less, and data shows part-time workers are having a harder time switching to full-time positions.
Fed moves
The Federal Reserve will convene on September 17-18 to decide on monetary policy. Economists widely expect a rate cut, the first since the Covid-19 pandemic, ending a 2-year monetary tightening cycle.
Although the cut is priced with 100% certainty by markets, its size still remains a matter of debate. Some believe the economy is ripe for a 50-point cut, while others say the Fed will be cautious and implement a 25-point cut.
Fed policymaker Cristopher Waller said he expects a 25-point cut followed by another one this year. “With inflation and employment near our longer-run goals and the labor market moderating,” Waller said, “it is likely that a series of reductions will be appropriate.”
The Fed has historically been cautious in this economic cycle. In July, markets were already hoping for a 25-point cut and were disappointed when the Fed kept rates stable instead.
But the Fed’s inaction in July stirred the financial markets, causing a day of global sell-off on August 5th. Historically, financial markets are more volatile in September, and the Fed needs to be careful not to provoke an unnecessary recession.
The final data the Fed needs to seal the deal is the August inflation, whose release will take place in the following days.
