Today’s U.S. employment report will provide further insight into the direction the Federal Reserve will take. Investors are expecting a resilient labor market, with July data being impacted by adverse weather conditions and special measures in industrial states that rely heavily on automotive production.
Fed ready to act?
The latest economic data has fueled speculation that the central bank led by Jerome Powell will begin lowering rates at this month’s meeting. Looking ahead to key inflation data, the Fed’s preferred measure, Core PCE inflation It increased by only 0.1% on a monthly basis, which translates to a 2.6% increase on an annual basis. This is still higher than the official target of 2%, but it is headed in the right direction.
The expectations of the insiders are that the Fed cuts rates by 25 points basis in September, and not 50 basis points, although a minority of analysts believe that even a slightly worse-than-expected reading could force the Fed to cut the cost of money by half a percentage point. It remains to be seen whether, by the end of the yearthere will be another intervention of the same size (25 or 50 points).
Over the course of 11 meetings, spread over the period from March 2022 to July 2023, the FOMC, the monetary policy arm of the Fed, raised rates by 525 basis points, in an attempt to curb runaway inflation in the United States. Rates are still stuck in the 5.25% to 5.5% range, the highest in the last 23 years, to which they were last raised in July 2023.
Waiting for the Job Report
Wall Street is gearing up for one of the most important economic releases of the year. According to the consensus, the report on pay slips Nonfarm Payrolls will show growth of 161,000 units in August, compared to the previous growth of 114,000 units. The unemployment rate is expected to decline slightly to 4.2% from 4.3%.
The labor market cooled faster than expected, calling into question today’s employment report. The July report showed payrolls growing by just 114,000. That wasn’t the lowest number of the year, but it fueled speculation that the central bank, too complacent to a weakening economy, could keep interest rates high for too long.
What followed was a series of reports that the economy is still on its feet, but hiring is slowing and the manufacturing sector is further slipping into the phase of contractionso it’s time for the Fed to start cutting, before it risks overdoing its fight against inflation and dragging the economy into recession.
The last bad news came on the eve, when the Automated Data Processing (ADP), the payroll processing company, estimated August private sector job growth of just 99,000, the lowest since January 2021.
Markets therefore expect the Fed to cut its benchmark rate by at least a quarter of a percentage point at its next meeting, which ends on September 18, with the possibility of a half-point cut growing. Traders are pricing in a series of cuts that would shave about 2.25 percentage points off the federal funds rate through 2025.
