August Jobs Data ‘Pivotal’ for Speed of Fed Rate Cuts, Says BofA

The forthcoming August jobs report is anticipated to significantly influence the Federal Reserve’s strategy regarding interest rate adjustments, according to analysts from Bank of America in a note released on Tuesday.

The bank forecasts that nonfarm payrolls will grow by 200,000, exceeding the consensus expectation, while the unemployment rate is expected to drop to 4.2%. They regard this data as crucial in guiding the Fed’s monetary policy decisions.

“The August jobs data will be vital for the pace of Fed cuts in the near future. Generally, we see three scenarios for Fed policy,” noted Bank of America.

In the first scenario, a strong jobs report would alleviate recession worries and lead to “hawkish cuts,” with the Fed likely to implement a reduction of 25 basis points per quarter, starting in September. This outlook may surprise markets, which are currently anticipating approximately 100 basis points of cuts.

The second scenario entails a more moderate report, showing payroll increases of 100,000 to 150,000 and an unemployment rate remaining stable at 4.3%. Bank of America suggests that such a report would neither affirm nor dismiss the likelihood of a recession, but it would indicate that the activation of the Sahm Rule wasn’t merely a temporary occurrence. In this case, the Fed might adjust its approach to 25 basis point cuts at all remaining meetings this year, with projections indicating more than 100 basis points of reductions for the next year. However, the possibility of a 50 basis point cut in September would likely not be on the table.

The third scenario, which is the most concerning, would involve a disappointing jobs report, such as payroll growth falling below 50,000 or a further increase in the unemployment rate, raising fears of a recession. In this situation, Bank of America suggests that the Fed could take an aggressive stance, implementing 50 basis point cuts in September, November, and December.

Ultimately, as highlighted by Bank of America, “details matter,” and the Federal Reserve will weigh all relevant data when making its decisions.