While inflation continues to hover above the Federal Reserve’s target of 2%, there are growing expectations that the Fed will implement a rate cut this September as a measure to address the weakening labor market. Federal Reserve Chair Jerome Powell has recently suggested that he is open to the idea, highlighting that “downside risks to employment are rising.”
After maintaining the key interest rate for nine consecutive months, the central bank is anticipated to announce a rate cut at the conclusion of its two-day meeting on September 17. This potential move follows a series of disappointing job reports, which may have finally swayed Powell, despite ongoing pressure from President Donald Trump urging lower rates.
Nationwide Chief Economist Kathy Bostjancic expressed that the notion of cutting interest rates in September is bolstered by four months of underwhelming employment data, indicating a severe slowdown in hiring. She pointed out that this reality raises questions about how many additional rate cuts may follow after September.
The rationale behind a rate cut largely revolves around the Fed’s dual mandate: promoting maximum employment while controlling inflation. In times of a weak labor market, lowering interest rates can reduce borrowing costs for both businesses and consumers, effectively stimulating economic growth and encouraging job creation. Conversely, when inflation is high, the Fed may raise rates to temper economic activity.
This year, the Fed has faced a complex situation, especially with tariffs affecting both growth and consumer prices. Recent employment data has intensified the call for action, with the U.S. economy only adding 22,000 jobs in August. This disappointing number comes amidst challenges posed by trade, immigration, and federal employment policies. As a result, the unemployment rate has reached its highest since October 2021, prompting revisions that revealed the U.S. lost 13,000 jobs in June for the first time since December 2020.
Moreover, a newly released report from the Bureau of Labor Statistics also pointed out that firms hired nearly a million fewer workers than initially estimated within the year ending March 2023, providing another significant reason for the Fed to consider a cut.
While inflation remains a concern, August figures suggest that it may not be enough to deter a rate cut. Consumer prices rose modestly to 2.9%, while core inflation remained steady at 3.1%. The rising jobless claims underscore the need for action, as many analysts assert that the labor market is losing momentum.
Despite having maintained steady rates for a long time, the Fed’s response to a rapidly changing economic environment seems poised for adjustment. Powell previously acknowledged the visible effects of tariffs on prices but indicated that their impact would likely be temporary. As he stated, the current balance of risks indicates greater concern for employment than for inflation.
Current market expectations point towards a significant probability of a rate cut, with estimates of a 92% chance of a 25 basis point reduction. The current federal funds rate range stands between 4.25% and 4.5%. However, some economists, like Raymond James Chief Economist Eugenio Aleman, suggest that the possibility of a more aggressive cut could be limited unless signs of impending recession intensify.
Predictions for future cuts remain divided among economists. Many anticipate a possible rate cut in September, while forecasts for subsequent cuts vary, with a Bloomberg survey indicating a median expectation of two cuts by year’s end.
Complicating the decision-making process is the ongoing legal situation surrounding Fed Governor Lisa Cook. A federal judge recently ruled that she could continue her work at the Fed while contesting Trump’s attempt to remove her, raising questions about the central bank’s independence from political influence. Cook has denied allegations of wrongdoing as the disputes regarding her position unfold, all occurring just before the pivotal Fed meeting.
As the Fed prepares for its September meeting, the economic landscape remains fraught with uncertainty, with labor market developments playing a critical role in shaping its upcoming decisions.
