The US job market shocked on Friday following the release of dull employment data, putting increased pressure on the Federal Reserve to cut interest rates in September. The report supported concerns that the economy was slowing and boosted speculation the Fed would cut rates more sharply than anticipated.
Weak Job Growth Sparks Concern
The Bureau of Labor Statistics indicated employers hired only 22,000 jobs in August, while the unemployment rate rose to 4.3%. Compounding worry, revisions indicated payrolls went negative in June for the first time since the final quarter of 2020. Economists caution these statistics indicate growing fissures in the labour market. KPMG chief economist Diane Swonk said, “This highlights that the cracks in the labour market are widening and that is concerning.”
Markets rapidly priced in a quarter-point rate reduction for the Sept. 16-17 meeting, with futures now reflecting expectations of three reductions this year. Some analysts contend the Fed even might opt for a half-point cut if inflation readings next week do not reveal new risks.
Balancing Inflation and Unemployment
The Fed’s dual mandate of keeping prices stable and fostering employment has seldom appeared more at odds. With inflation still over the 2% level, unemployment is rising. Fed Chairman Jerome Powell recognized the changing balance in an August address at Jackson Hole, suggesting a rate reduction. Others, such as New York Fed President John Williams, have repeated the call for easing “over time.
Nevertheless, there is dissent. Regional presidents such as Cleveland’s Beth Hammack caution that tariffs and inflation in the service sector can reignite pressure on prices, and thus make deep cuts risky. Chicago Fed President Austan Goolsbee stated he is not ready to call it yet, wanting to wait for new inflation figures.
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Political and Policy Pressures
Politics also complicates the debate. With an open seat on the Fed’s Board of Governors and a Trump nominee, Stephen Miran, in waiting, the September meeting may shift in the direction of more rapid easing. Trump has continually pushed the central bank for deep and swift reductions.
Even after the soft jobs number, most Fed observers contend that a 50-basis-point reduction is still unlikely. Morgan Stanley’s Michael Gapen stated, “You could make the argument that perhaps the Fed does have to move sequentially and reduce by 25 per meeting and not, for example, 25 per quarter.”
For the time being, markets are preparing for a pivotal September decision, one which will set the tone for the Fed’s balancing act between slowing growth and sticky inflation.
