If Unemployment Rate Is 4.3%, Fed Will Cut 50bps: Read By Investing.com

Investing.com – If the U.S. unemployment rate remains at 4.3%, the Federal Reserve will likely implement a 50 basis point (bps) rate cut at its next meeting in September, Citi economists said in a note from Thursday.

“An unchanged unemployment rate would mean that July could not be considered a weather-distorted outlier,” they explained.

However, if the unemployment rate falls slightly to 4.2%, the Fed could opt for a smaller 25bp cut unless the labor market shows further signs of weakness, such as weaker growth in salaries. Specifically, Citi points out that an unemployment rate of 4.2% would have to be accompanied by wage growth of no more than 125,000 to justify the larger cut.

“Since wages were just revised down by an average of 68,000 per month, a figure like 125,000 could turn out to represent something closer to 55,000 new jobs,” Citi noted.

The bank also discussed other labor market indicators such as the nature of unemployment and data from the Job Openings and Labor Turnover Survey (JOLTS).

A rise in permanent unemployment or an increase in layoffs would further support a more aggressive rate cut. Analysts expect the upcoming jobs report, which will be released a week before the Federal Open Market Committee (FOMC) meeting, will play a crucial role in determining the size of the interest rate cut.

Citi’s baseline view is that the unemployment rate will remain at 4.3%, along with the addition of 125,000 new jobs. As such, policymakers are expected to cut interest rates by 50bps at the next FOMC meeting.

Federal Reserve Chairman Jerome Powell signaled last week that interest rate cuts are on the horizon, though he did not specify when or how much.

“The time has come for policy to adjust,” Powell said during his keynote speech at the Fed’s annual retreat in Jackson Hole.

He stressed that while the direction is clear, the specific timing and speed of rate cuts will be guided by incoming data, the changing economic outlook and the balance of risks.