Friday's lower unemployment figure is a strong indication that the Federal Reserve may cut rates by 0.25% instead of 0.50% when it meets in less than two weeks, economists say.
"This is the moment we've all been waiting for and, based on the data, it looks like the Fed won't need to panic and start with a 'jump' rate cut," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
"Most likely the Fed will cut rates by 0.25% on 9/18 and then will have to watch the data from there, with our base case being two more rate cuts of 0.25% each in November and December," he added.
Before the release of the August jobs report, traders priced in a 43% probability of a 50-basis-point interest rate cut by the Federal Reserve later this month.
Key Takeaways
- The U.S. economy added 142,000 nonfarm payrolls in August, marking a significant increase from July's downwardly revised 89,000.
- The 142,000 increase in nonfarm payrolls fell short of the 160,000 consensus estimate tracked by TradingEconomics.
- The unemployment rate fell from 4.3% in July to 4.2% in August, meeting expectations
- Average hourly earnings rose 0.7% month-over-month, up from a downwardly revised decline of 0.1% in July and beating estimates of 0.3%.
- Year-over-year, average hourly earnings rose 3.8%, up from 3.6% in July and beating forecasts of 3.7%.
Zaccarelli said unemployment dropping from 4.3% to 4.2% "could be the big news of the day," but it is less important than "the data beneath the surface."
"That's because it is an easy headline to run with and we are in a narrative-driven market," he said.
"While the bears have plenty to work with - in terms of a softening labor market and a slowing economy - the facts still show an economy that is expanding and not one that is imminently headed into recession, and for that reason we believe that once the election is behind us, we will see this bull market resume climbing to new all-time highs before the next bear market begins."
The Fed Funds Futures market adjusted quickly to the jobs report and indicates that the Fed will cut rates by 50 basis points at its Sept. 18 meeting, said Quincy Krosby, chief global strategist for LPL Financial.
"Hovering over the Fed's decision, however, is a concern that prices are inching higher within manufacturing and services," she said.
"Still, as the maximum employment mandate for the Fed has increasingly become its primary focus, the market now expects a deeper cut and it's worrisome for market participants.
"Today's comments from two Fed officials will be key to understanding whether the Fed sees today's print as a labor market normalizing to pre-Covid conditions or a worrisome indication about the softening of the broader economy."
But Charlie Ripley, senior investment strategist for Allianz Investment Management, said it is "unclear" at this point as to how much the Fed will lower rates on Sept. 18.
"Investors remain divided on how quickly the Fed should lower rates and the mixed employment data today did not augment the argument for either side, which is why the odds of a 50 basis point cut at the September meeting looks like a coin toss for now," he said.