August’s weak jobs report could influence the Fed to cut interest rates in September by Investing.com

Investing.com — Expectations for an excessive interest rate cut in September have faded as recent economic data clouded the economic outlook, showing recession fears were much ado about nothing, but with the labor market now monetary policy lead, the August jobs report has the potential to revive bets on a big rate cut in September.

The labor market is now in the driving seat of monetary policy

“If the Fed cuts by 50bps in September, it will come down to the August jobs report released in early September,” Citi economists, led by chief economist Andrew Hollenhorst, said in a recent note.

The added importance of the labor market comes as the latest inflation reading suggests a September rate cut is “absolutely a sure thing,” Citi said, likely shifting inflation into the Fed’s rearview mirror and shifting the central bank’s focus to the labor market.

“A third consecutive month of below-2% annual core CPI inflation makes a rate cut in September almost certain and should keep Fed officials focused on jobs and growth,” they added the economist.

A 50-basis-point rate cut could be sanctioned by Fed officials if the unemployment rate remains at 4.3 percent or rises, Citi estimates, and could even be possible if the jobless rate falls just 0.1 percent.

Citi’s call for a bigger cut and further deterioration of the labor market has merit. Fed Chairman Jerome Powell has repeatedly signaled increased focus on the labor market and said the central bank will act if there is unexpected slack.

“Should the labor market weaken unexpectedly or inflation decline faster than anticipated, we are prepared to respond,” Powell said at the July 31-August 1 FOMC press conference. The Fed chief acknowledged that the labor market had cooled and returned to pre-pandemic levels, but said it remained “strong” but not overheated.

Was the weakness in July’s jobs report ‘transitory’?

But the remarks came before July’s nonfarm payrolls showed the U.S. jobless rate rose 0.2 percent to 4.3 percent, sparking recession fears and prompting many to push the button of stock panic.

“The most worrying sign is the unemployment rate rising to 4.3% from a low of 3.4%,” Citi said, although recent jobless claims data, which have fallen over the past two weeks, raise “expectations that jobs of poor work”. the July report may have been “transitional”.

The reassuring data raised the odds to about 75% that the Federal Reserve will cut by just 25 basis points in September, rather than 50 bps, with the odds of the latter now just 25%, compared to 51% on the week previous

Powell to keep the books close at Jackson Hole

With weeks to go until the August non-farm payrolls report due on September 6, Powell’s comments in Jackson Hole next week “could also be important in assessing the Fed’s likely path,” they added the economists.

But Fed Chairman Jerome Powell is expected to keep his monetary policy cards close to his chest as policy-making data, including the August jobs report, will still be on the horizon.

“As policy action in September hinges on yet-to-be-released data, Powell is unlikely to provide clear guidance toward a cut of 25 or 50 basis points,” they added.

But there is a risk that Chairman Powell could hint at a policy loosening if he signals the need “more quickly to get a neutral framework,” Citi said.