Fed May Need to Cut Aggressively as Job Market Struggles Rise

According to analysts at Citi, the Federal Reserve may need to pursue more aggressive interest rate cuts in light of troubling trends in the labor market.

The bank highlights a growing percentage of respondents reporting difficulty in finding jobs, suggesting that the increase in unemployment is not just due to a larger labor pool, but rather indicative of weak hiring conditions. This trend, observed in a recent Conference Board survey, is reminiscent of the economic climate in September 2001, when the U.S. was already in recession.

The rising challenge of securing employment underscores that the uptick in the unemployment rate reflects a softening job market rather than a healthy labor supply. This situation raises concerns of a potential “hard landing” for the economy, increasing the likelihood of further substantial rate cuts by the Federal Reserve.

Citi points out that recent data reveals a broader trend of weakened labor demand. They anticipate a modest addition of 70,000 jobs in the upcoming September payrolls report, a significant decline from prior robust growth figures. The bank expressed surprise at the resilience of job growth in sectors like construction, leisure and hospitality, and government, despite considerable reductions in activity.

If this trend continues, Citi predicts the unemployment rate may rise to around 4.3%, and possibly even reach 4.4% if workforce participation does not decline as anticipated. They maintain their expectation for a 50 basis point rate cut in November, noting that the risks appear to lean toward adopting a more dovish stance, which could include further cuts of 50 basis points or even 75 basis points.