If the Unemployment Rate is 4.3%, Fed Will Cut by 50bps: Citi

According to a note from Citi economists, if the U.S. unemployment rate holds steady at 4.3%, the Federal Reserve is likely to implement a 50 basis points (bps) rate cut during its next meeting in September. The economists explained that a stable unemployment rate would indicate that the July figures are not an anomaly influenced by weather conditions.

Conversely, if the unemployment rate decreases slightly to 4.2%, the Fed may choose a smaller cut of 25bps, provided that there are no further indicators of weakness in the labor market, such as declining payroll growth. Citi emphasized that for a 4.2% unemployment rate to justify the larger cut, payroll growth would need to be capped at 125,000 jobs.

The bank noted that recent revisions to payroll figures indicate an average downward adjustment of 68,000 jobs per month, suggesting that a reading of 125,000 might be closer to an actual addition of around 55,000 new jobs.

Citi also highlighted the importance of other labor market metrics, such as the nature of unemployment and data from the Job Openings and Labor Turnover Survey (JOLTS). An increase in permanent unemployment or rising layoffs could further support the case for a more significant rate cut. The analysts anticipate that the forthcoming jobs report, which will be released shortly before the Federal Open Market Committee (FOMC) meeting, will be critical in determining the extent of any rate cut.

Citi’s primary outlook anticipates that the unemployment rate will remain at 4.3% with the addition of 125,000 jobs, leading them to predict a 50bps rate cut at the next FOMC meeting.

Last week, Federal Reserve Chair Jerome Powell indicated that interest rate cuts are approaching, although he did not specify the timing or magnitude. He stated, “The time has come for policy to adjust,” during his keynote address at the Fed’s annual retreat in Jackson Hole, emphasizing that upcoming decisions will be influenced by new data, changing economic prospects, and the overall balance of risks.