Will the Fed Cut Rates in September, and by How Much?

Employment Report Signals Fed Rate Cut

The latest employment report from the United States strongly indicates that the Federal Reserve will enact a rate cut in September.
However, a lingering question remains regarding the magnitude of this cut and whether it will be the last of the year.

As inflation continues to steadily decline, recorded at 2.9% in July, the Fed is now redirecting its focus towards the health of the U.S.
labor market.
In recent months, there has been a noticeable drop in job creation, accompanied by a rise in unemployment claims.
Additionally, the unemployment rate has slightly increased from last year’s historic low of 3.7%.

August saw the addition of 142,000 jobs, a significant rise compared to the 89,000 jobs added in July and 86,000 in June.
Economists suggest that the summer season significantly impacted the reporting figures for July and June.

Importantly, the unemployment rate in August fell for the first time in months, settling at 4.2%, compared to 4.3% in July.
Becky Frankiewicz, North American president of ManpowerGroup, remarked, “The floor isn’t falling out, and we’re not looking at a rocket.
It’s stability.”

Labor Market Weakness

However, more detailed data underscores a weakening labor market, indicating that U.S.
workers are in a more precarious situation than last year.
Employers are hiring less frequently, and evidence shows that part-time workers are struggling more to transition into full-time roles.

Looking ahead, the Federal Reserve will meet on September 17-18 to deliberate on monetary policy.
Economists are widely expecting a rate cut, the first since the COVID-19 pandemic, marking an end to a two-year cycle of monetary tightening.

Future Speculations

While markets are firmly pricing in a 100% chance of a cut, the extent remains debated.
Some analysts advocate for a sizable 50 basis point cut, while others believe the Fed will approach with caution, opting for a 25 basis point reduction.

Fed policymaker Christopher Waller anticipates a 25 basis point cut followed by another this year, stating, “With inflation and employment near our long-term targets and the labor market moderating, a series of reductions is likely appropriate.”

Historically, the Fed has adopted a cautious stance throughout this economic cycle.
The disappointment in July, when the Fed chose to maintain rates rather than cut them, sparked a global sell-off on August 5.
Traditionally, financial markets display more volatility in September, requiring the Fed to carefully navigate potential unnecessary recessions.

The last key data point the Fed needs to finalize its decision will be August’s inflation figures, which are expected to be released shortly.

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Original article published on 2024-09-06.