Size of Federal Reserve Interest Rate Cut Depend on Jobs Report

Pivitol Jobs Report will Impact Size of FED Rate Cuts

The upcoming August employment report is crucial for the Federal Reserve’s decision on interest rate cuts, expected in mid-September. While recent inflation data has shown a slowdown, concerns about a weakening labor market complicate the Fed’s stance. A strong jobs report could lead to a smaller quarter-point cut, while a disappointing one might prompt a larger half-point reduction. The Fed’s approach is cautious, aiming to balance economic stability with the risk of further job market deterioration.

Recent hiring has hit lows with significant layoffs in the tech sector for example. The expections of the market are for a 0.35% cut in the September meeting. The FED does not normally cut by that amount thus this represents an average of either 0.25% or 0.5% cut. In short, lots of uncertainty at a critical turning point.

Update:  Non-Farm Payrolls just came in at 142K versus estimate of 165K.  Initial market reaction is for 0.5%, we still estimate 0.25% since report was better than previous one and wage increase at 0.4% versus estimate of 0.3%.  In short, a cut is coming but we don’t think it will be 0.5% right before the US election.

Key Points

• Importance of Jobs Report: The August employment data will significantly influence the Fed’s rate cut decision.
• Rate Cut Expectations: A decent jobs report may result in a modest quarter-point cut; a weak report could lead to a larger half-point reduction.
• Recent Labor Market Trends: Unemployment rates have risen, raising concerns among officials about potential job market weakness.
• Fed’s Cautious Approach: Officials aim to prevent a serious economic slowdown while navigating uncertain economic conditions.
• Historical Context: The Fed typically favors gradual adjustments (quarter-point cuts) unless facing urgent economic crises.

Economic Context and Implications

The backdrop of the employment report is set against a landscape of mixed economic signals. On one hand, inflation has shown signs of easing, indicating that previous rate hikes may be starting to take effect. On the other hand, the labor market exhibits fluctuations, with recent job gains slowing down and layoffs increasing in certain sectors. This duality creates a challenging environment for policymakers, as they weigh the risks of stifling growth against the need to combat inflation.

In addition to the anticipated job gains, analysts are closely monitoring other indicators that could signal broader economic trends. For instance, the average hourly earnings data will be scrutinized to gauge wage growth, which has implications for inflation. If wages continue to rise, it might suggest persistent inflationary pressures,

Federal Reserve’s Considerations

As the Federal Reserve approaches its mid-September meeting, several factors will be under consideration:

1. Inflation Trends: Despite a decrease in inflation rates, the Fed remains vigilant about potential price stability threats. The core inflation rate, which excludes volatile food and energy prices, is particularly scrutinized.
2. Consumer Spending: Consumer behavior is another critical indicator. If spending remains robust, it could signal resilience in the economy, influencing the Fed to adopt a more measured approach to rate cuts.
3. Sector-Specific Analysis: Certain industries, such as technology and retail, have shown vulnerability with rising layoffs. The Fed will assess whether these trends are isolated or indicative of broader economic weakness.
4. Global Economic Factors: International economic conditions, including geopolitical tensions and supply chain disruptions, will also play a role in shaping the Fed’s decisions.

Potential Outcomes

• If the Jobs Report Surprises Positively: A strong employment report could lead to a more conservative approach from the Fed, potentially opting for a quarter-point cut while maintaining a close watch on future data.
• If the Jobs Report Falls Short: Conversely, if the report indicates significant job losses or a spike in unemployment, the Fed may respond more aggressively with a half-point cut to stimulate the economy.

As stakeholders await the August employment report, the stakes are high. The outcome will not only influence interest rate decisions but also set the tone for economic policy in the months ahead. Investors, businesses, and consumers alike will be closely monitoring developments as they navigate an increasingly complex economic landscape. The Federal Reserve’s balancing act will require careful deliberation and a keen understanding of both current conditions and future projections.

Our view is that FED will cut by 0.25% in September with either 0.75% to 1.0 % by the end of the year. In the short term, the investors should be warned that depending on the outcome of the jobs report, it could have global implications on the USD-Japanese YEN rate. If this speeds up the unwinding of the carry trade, the stock market will fall.