Citi Projects Solid Job Growth and Anticipates 50bps Fed Rate Cut

According to analysts at Citi Research, the U.S. job market continues to demonstrate strength, even as the economy shows signs of slowing.

As the Federal Open Market Committee (FOMC) meeting in September approaches, Citi anticipates that the Federal Reserve will begin a rate-cutting cycle, potentially reducing rates by 50 basis points as soon as this month. This decision is expected to be influenced by recent employment data, which, while indicating some moderation, still reflect solid job growth.

Citi analysts note that despite broader economic challenges, job growth in the U.S. remains relatively stable. For August, the firm forecasts a modest increase of 125,000 in nonfarm payrolls, a slight improvement from July’s figure of 114,000.

The unemployment rate is projected to remain steady at 4.3%, with a chance it could round down to 4.2%. This sustained job growth implies that the labor market is not softening as rapidly as some had anticipated.

The Federal Reserve’s response to the August jobs report will be pivotal. Citi Research expects the Fed to lower interest rates by 50 basis points at the upcoming September meeting, contingent on the jobs report meeting their predictions of 125,000 payrolls growth and a 4.3% unemployment rate. This rate cut would be warranted if there are perceived downside risks in the labor market, particularly if job growth falls below 175,000 and the unemployment rate remains high.

The broader economic context plays an important role in the Fed’s likely actions. Consumer spending has stayed robust, featuring a 0.5% month-on-month increase in July, partly attributed to strong motor vehicle consumption. However, the savings rate, currently at just 2.9%, may not be sustainable with rising unemployment. When the savings rate increases, spending is expected to slow down. Additionally, core PCE inflation was noted at 0.16% month-on-month, further supporting expectations for a rate cut, as inflationary pressures ease.

Citi Research suggests that a 50 basis point cut in September could mark the beginning of a series of rate reductions by the Federal Reserve, with potentially more cuts in future meetings depending on economic data, particularly from the labor market. Analysts noted that Chair Powell appeared open to a larger cut and hinted at preparatory measures for such an action during recent discussions, citing “ample room” to reduce policy rates.