Soft August Jobs Report Could Influence Fed to Implement Significant Rate Cut in September

Investing.com — Expectations for a significant rate cut in September have diminished as recent economic data clarified the outlook, suggesting that fears of a recession were exaggerated. However, with the labor market now taking a central role in monetary policy, the August jobs report could reignite speculation regarding a substantial rate reduction next month.

### Labor Market’s Key Role in Monetary Policy

According to economists at Citi, led by Andrew Hollenhorst, the decision on whether the Federal Reserve will implement a 50 basis point cut in September hinges on the upcoming jobs report, which will be released in early September. The increased focus on the labor market coincides with recent inflation data indicating that a September rate cut has become nearly assured, allowing the Fed to shift its attention away from inflation and toward employment dynamics.

Citi noted that three consecutive months of core CPI inflation at sub-2% rates make a rate cut highly likely, keeping Fed officials focused on employment and economic growth. They estimate that if the unemployment rate holds steady at 4.3% or rises, a 50 basis point cut could be approved. Interestingly, even if the unemployment rate dips by just 0.1%, a similar cut could still be on the table.

### Assessing the Labor Market’s Condition

Fed Chairman Jerome Powell has highlighted the necessity to act if any unexpected weakening in the labor market occurs. He acknowledged at the recent FOMC press conference that while the labor market has cooled to pre-pandemic levels, it remains robust but not overheated.

Concerns arose when the July jobs report indicated a rise in the unemployment rate to 4.3%, up from a low of 3.4%, raising recession alarms and triggering market unrest. However, Citi noted a positive trend in jobless claims that have been declining over the past two weeks, suggesting that the weak jobs data from July might have been a temporary spike.

This reassessment has adjusted expectations to around 75% chance that the Federal Reserve will only opt for a 25 basis point cut in September, while the likelihood of a 50 basis point cut has dropped to about 25% from 51% the previous week.

### Anticipating Powell’s Statements at Jackson Hole

With the August nonfarm payrolls report due on September 6, Powell’s remarks at the upcoming Jackson Hole economic symposium are expected to be crucial in shaping market sentiment regarding the Fed’s future direction. However, it is anticipated that Powell will keep his policy intentions ambiguous, given that vital data influencing the September decision has yet to be released.

Citi analysts indicate that since pivotal information is still forthcoming, it is unlikely Powell will provide explicit guidance regarding a potential 25 or 50 basis point cut. Nonetheless, there exists a risk that he may suggest a readiness to relax policy further should he convey the necessity to act swiftly in achieving a neutral monetary stance.