With a Light Jobs Report, How Big a Rate Cut Will the Fed Do?

The highly anticipated August jobs report — seen as a last-minute influence on a September rate cut by the Federal Reserve — came in lighter than expected. The reported 142,000 was 11.8% lower than the median forecast of 161,000, as collected by Dow Jones. The drop in unemployment to 4.2% from 4.3% was as projected.

Since the Federal Reserve’s annual Jackson Hole retreat, it’s been clear that the central bank would start cutting the benchmark federal funds rate. For years, concerns about inflation and battling it took center stage. The central bank has shifted its attention to the other aspect of its dual mandate, from maintaining stable prices to ensuring full employment. As Powell said, “We do not seek or welcome further cooling in labor market conditions.”

How many cuts past September or the size of any continue to be unknown because the Fed is also unlikely to know. It depends on the data that has yet to be compiled and released. “It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon,” Powell also said.

In early August, an unexpectedly low performance in the labor market was a factor — the other major one being the carry trade — that sent equities markets into a panicked drop. The importance of a stable labor market can’t be understated, which is why the jobs report was seen as one of the critical data barriers to a decision, affecting the size of a cut and even potentially its existence.

Today’s report for August jobs offers opportunities for mixed interpretations.

“Today’s jobs report demonstrates that this summer’s Great Waiting Game has continued, with both employers and employees holding out for proof of improvement versus speculation of forecasts,” wrote Becky Frankiewicz, president and chief commercial officer of ManpowerGroup North America in emailed comments. “Our real-time data showed an August pick-up in job postings following a slower July, but year-over-year stability.”

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, wrote in an email, “Given the weaker-than-expected, but not falling-off-a-cliff numbers that we got this morning, it’s unlikely that a 50 bps cut is necessary, and the Fed will likely proceed at a measured pace of 25 bps cuts at each meeting for the rest of the year.”

However, downward revisions are worrying. July’s 114,000 estimate is now down to 89,000 through revisions, Jeffrey Roach, chief economist for LPL Financial, pointed out in an email.

And University of Central Florida economist Sean Snaith said in written remarks: “The jobs number came in a little short. Wage growth was higher than expected. There’s data here that could help make a case for the Fed either way.” He further urged the Fed to wait on a cut, no matter how much Wall Street wants it. “There’s so much weight being put on this report, but the totality of it isn’t setting off alarms that the Fed needs to start cutting. They should continue to wait and see the progress on inflation.”