Fed Under Pressure to Cut Rates in September as Job Market Cools

June’s jobs report sent a mixed message, with job gains have remained better than expected in a strong status but other indicators are suggesting a slowdown. This has increased pressure on the Federal Reserve to cut interest rates in September.

Job Growth Flatters, Not Deceives:

While headline numbers showed solid hiring, the unemployment rate rose and wage growth slowed. This suggests the labour market is cooling, potentially signaling a need for looser monetary policy.

Market Anticipates September Rate Cut:

Investors are largely expecting a rate cut in September, with the June jobs report solidifying this view. Economic data is pointing towards a slowdown, making a rate cut more likely.

Shifting Policy:

From Steady Rates to Potential Cuts: The Fed initially projected no rate cuts in 2024, but forecasts indicated a growing number of officials favoring two cuts. Recent labour market data strengthens the case for a rate cut.

Labour Market Takes Center Stage:

The rise in unemployment brings the Sahm Rule into play, historically a recession indicator. This, coupled with slowing wage growth, suggests a potential need for Fed action to prevent a downturn.

Investors Content, But Wary:

While investors welcome the prospect of lower rates, they remain cautious given the strong stock market performance this year. Inflation remains a concern, with the Consumer Price Index report next week being a key data point. Investors appear content, but not overjoyed, by the prospect of an immaculate disinflation. And after all, the S&P 500 just gained 14.5% in the first six months of the year.

Focus Shifting from Inflation to Jobs?

Recent data suggests the Fed might prioritize the labour market over inflation. While inflation is on a “disinflationary path,” rising unemployment could prompt the Fed to act swiftly.

Powell’s Key Events:

Prior to September’s FOMC meeting, Fed Chair Powell’s upcoming Senate Banking Testimony, on July 9, and the Jackson Hole Symposium, in August, could signify a policy change towards a September rate cut.