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August Jobs Report Likely to Determine Size of Fed’s Rate Cut

Friday's August jobs report will likely be a pivotal factor in determining whether the Fed cut rates by 25bp or 50bp at its upcoming September meeting.

The release of the August jobs report is set to be a pivotal moment for the U.S. economy, determining not only the Federal Reserve’s next steps but also the broader outlook for growth and recession risks. Following a disappointing July jobs report that showed the economy adding just 114,000 jobs—far below the 175,000 expected—the upcoming August numbers are under intense scrutiny. Economists and market analysts agree that the results will have far-reaching implications, potentially shaping the size of the Fed’s expected interest rate cut later this month.

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A Slowing Labor Market

The consensus is that nonfarm payrolls in August will show an increase of about 165,000 jobs, with unemployment ticking down slightly to 4.2%. These figures, while a modest improvement from July, still reflect a slowing labor market. “The labor market has cooled faster than we originally had been told,” said Giacomo Santangelo, an economist at Monster. “What the Fed is going to do in response, how they will adjust rates, is why we are having this conversation.”

Concerns about the labor market’s health have grown as hiring has slowed throughout 2024. Private sector job growth, according to ADP, came in at just 99,000 in August, the smallest gain since early 2021. This marks the fifth consecutive month of declining payroll additions, further suggesting that businesses are pulling back on hiring as demand softens.

The Fed’s Dilemma

The Federal Reserve now faces a challenging decision. With inflation easing, attention has shifted to the labor market. Jerome Powell, the Fed’s chair, noted in late August that the “cooling in the labor market has been unmistakable.” This shift in focus signals that the Fed may need to act more aggressively to prevent further economic weakening. If the jobs report shows significant deterioration, a more substantial rate cut—perhaps 50 basis points—could be on the table.

Citi economist Veronica Clark said:

“August employment data will be the pivotal factor determining whether Fed officials are likely to start the rate-cutting cycle with a 50bp or 25bp cut in September.”

A weak jobs report, even with a slight decline in unemployment, may push the Fed toward a more aggressive stance to stave off recession risks.

Recession Fears and Market Reactions

A key concern for the Fed and the market is the prospect of a recession. The July jobs report triggered recession fears when it showed an uptick in the unemployment rate, reaching 4.3%—the highest since 2021. While a single month’s data does not confirm a downturn, two consecutive months of disappointing jobs numbers could signal deeper trouble ahead.

Michael Reid, an economist at RBC Capital Markets, emphasized the significance of the August jobs report, stating:

“It’s going to be the most closely watched employment report in some time.”

If job growth continues to falter, recession concerns could intensify, especially as the Fed has kept interest rates at a 23-year high to combat inflation.

Market reactions are also likely to be volatile. Typically, rate cuts are seen as positive for stocks, as they lower borrowing costs and stimulate investment. However, if the rate cut is viewed as a response to worsening economic conditions, investor sentiment could turn negative. “Bad news is bad news again,” said Jason Ware, chief economist at Albion Financial Group, referring to the possibility that a poor jobs report could stoke fears of a looming recession, outweighing the positive impact of a rate cut.

Balancing Act for the Fed

The August jobs report, therefore, represents a delicate balancing act for the Fed. A strong or moderately weak report could support a smaller, 25 basis point cut, allowing the Fed to remain cautious as it navigates a fragile economic recovery. On the other hand, a second consecutive weak report could compel the central bank to take bolder action to avoid a deeper downturn.

As the Fed prepares to meet in mid-September, all eyes will be on the Bureau of Labor Statistics’ report. Whatever the outcome, it will likely set the tone for economic policy—and the markets—through the rest of 2024.

US Stock Market Activity

With the crucial August jobs report scheduled for release tomorrow morning, US markets finished the day relatively flat, with the S&P 500 Index ($SPX) closing today’s trading session down 0.3% at 5,503.41.

The Dow Jones Industrials Average ($DOWI) closed today at 40,755.75, down 0.54%. The Nasdaq Composite ($NASX) closed the day at 17,127.66, up 0.25%.

The SPDR SP 500 ETF Trust (NYSE Arca: SPY), which aims to provide investment results that correspond generally to the price and yield performance of the S&P 500 Index, closed today down 0.24% at $549.61.

S&P 500 Index (SPX) six-month candlestick stock chart.
S&P 500 Index (SPX) six-month interactive stock chart. (Source: Barchart)

View S&P 500 Chart on Barchart

Read Next: Bank of Canada Cuts Rates for Third Time in a Row, Says Larger Rate Cuts Possible

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Disclaimer: Wealthy VC does not hold a position in any of the stocks, ETFs or cryptocurrencies mentioned in this article.

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