[NEW YORK] Disappointing employment data released on Friday (Sep 5) validated fears that the US labour market may be on the brink of a downturn and lifted expectations for how much the US Federal Reserve will lower interest rates this year.
Investors are now fully pricing in a quarter-point rate cut at the Fed’s Sep 16 to 17 policy gathering. They also pushed closer to anticipating a total of three rate cuts this year, according to futures contracts. Some Fed watchers said that the weak jobs data could spur officials to consider a larger-than-typical half-point this month, though inflation data due next week could temper those expectations.
“There’s no question they are going to cut a quarter point,” said Diane Swonk, chief economist for KPMG. “This underscores that the cracks in the labour market are getting wider and that is problematic.”
The reaction came after the Bureau of Labor Statistics said that employers added 22,000 jobs in August and the unemployment rate rose to 4.3 per cent. The figures, including revisions that showed payrolls were negative in June for the first time since December 2020, locked down expectations that officials will need to intervene this month to support the labour market, even as inflation remains above the Fed’s 2 per cent target and may head higher because of tariffs.
Economists at Barclays said after the report that they now see three rate cuts this year, one at each of the Fed’s remaining meetings, compared to the two reductions they previously expected.
After this month, Fed officials will meet twice more in 2025, on Oct 28 to 29 and Dec 9 to 10.
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Even prior to the latest jobs report, a substantial slowdown in payroll growth over the summer had prompted comments from Fed chair Jerome Powell and other policymakers that the balance of risks was shifting away from inflation and towards unemployment.
Powell hinted at a coming rate cut in an Aug 22 speech in Jackson Hole, Wyoming. And on Thursday, New York Fed president John Williams said that it would be appropriate to cut rates “over time”, also nodding to the shifting balance of risks.
“The weakness in payroll data can no longer be ignored or chalked up as a one-off,” said George Catrambone, head of fixed income at DWS Americas.
But policymakers ready to lower rates may be in for a heated discussion at their next gathering. Some officials, including Cleveland Fed president Beth Hammack and Kansas City’s Jeff Schmid, have expressed concerns about the risk that tariffs and other policies could reignite persistent price pressures.
Chicago Fed president Austan Goolsbee on Friday said that he’s still undecided on what action he will support at this month’s meeting, adding he would like to see the inflation data coming next week before he decides.
“The more mild numbers we get on inflation, the better I will feel about just focusing on the labour market,” Goolsbee said. “But in the last inflation reports, we also had this uptick in inflation coming from services, so I think we want to make sure that that’s more of a blip and not a more ominous indicator.”
Conflicted mandate
The divergence of the Fed’s two mandates, with the labour market weakening while inflation remains above its 2 per cent target, is a dreaded situation for central bankers, but also one they forecast a few months ago.
In June, the last time Fed officials released economic projections, they forecast climbing unemployment and inflation around 3 per cent. At the time, they signalled that would warrant two rate cuts this year, based on the median projection of 19 policymakers.
What’s played out since then, nearly exactly what they forecast save for somewhat stronger growth, argues for keeping to that same projected path for policy, said Brett Ryan, senior US economist at Deutsche Bank.
“That is the anchor here,” Ryan said of the June projections. “You could be revising growth and inflation up but your unemployment rate is the same, so why are you adding to cuts in that world?”
But the Fed has also changed since June. At the July meeting, when officials left rates unchanged, two governors dissented in favour of a cut. A new vacancy on the board and a fast-tracked confirmation process for a Trump-appointed replacement means there will be even more support for a faster pace of rate cuts. The president has repeatedly urged the Fed to lower rates quickly and aggressively.
Trump’s pick to fill the vacancy on the Fed’s Board of Governors, Stephen Miran, is expected by some to push for a half-point cut if he’s confirmed by the Senate in time for the Sep 16 to 17 gathering.
Still, the weak employment report may not be enough to sway the rest of the committee, according to many Fed watchers.
“I don’t think this warrants a 50-basis-point cut in September,” said Michael Gapen, chief US economist for Morgan Stanley. “But you could argue that maybe the Fed needs to move sequentially and cut by 25 per meeting rather than, say, 25 per quarter.” BLOOMBERG
