As recent economic data defogged recession fears, expectations for a supersized rate cut in September have been losing steam. However, with the labor market now taking the lead in monetary policy decisions, the upcoming August jobs report could change the game.
Labor Market Steers Monetary Policy
Citi economists believe that whether the Fed decides on a 50bp cut in September will hinge on the August jobs report. The latest inflation data has almost guaranteed a rate cut next month, shifting the Fed's focus towards employment and growth.
If the unemployment rate remains at 4.3% or increases, a 50 basis point rate cut could be on the horizon, according to Citi. Fed Chairman Jerome Powell has emphasized the importance of the labor market and indicated readiness to act if unexpected weakness occurs.
July Jobs Report Weakness: 'Transitory'?
Following the rise in the U.S. unemployment rate to 4.3% in July, concerns about a recession prompted panic in the stock market. However, recent jobless claims data suggest that the weakness in the July jobs report may have been temporary.
The odds of a 25bp rate cut in September have increased to 75%, with only a 25% chance of a 50bp cut. Powell's comments at Jackson Hole next week could provide further insight into the Fed's future actions.
Powell's Strategy at Jackson Hole
With the August jobs report still pending, Powell is likely to keep his cards close regarding future monetary policy decisions. While the Fed Chairman may not provide clear guidance on the size of the rate cut, there is a possibility of a hint towards easing policy if needed.
Analysis:
The upcoming August jobs report has the potential to impact the Federal Reserve's decision on a rate cut in September. If the labor market weakens or inflation drops unexpectedly, the Fed may opt for a bigger rate cut to stimulate growth. Investors should pay close attention to Powell's comments at Jackson Hole for hints on the Fed's future actions, as these decisions can have significant implications on the financial markets and individual finances.