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June jobs report adds pressure on Fed to cut rates in September
O June Jobs Report sent a clear message to the Federal Reserve — the central bank is at risk of being left behind.
The increase of more than 200,000 jobs last month complimented a report that suggested the U.S. labor market is cooling rapidly, as the unemployment rate hit its highest level since November 2021 and wage growth increased at the slowest annual rate since May 2021.
Neil Dutta, head of economics at Renaissance Macro, has become the leading voice on Wall Street arguing that the Fed should begin its rate-cutting cycle in September. In an email just minutes after Friday’s jobs report dropped, Dutta wrote: “[Friday’s] the jobs report should firm up expectations for a rate cut in September. Economic conditions are cooling and that makes the tradeoffs different for the Fed.”
In Dutta’s view, the Fed’s July meeting should set the stage for a cut in September.
Read more: What the Fed Rate Decision Means for Bank Accounts, CDs, Loans, and Credit Cards
Federal Reserve Bank Chairman Jerome Powell announces that interest rates will remain unchanged during a news conference at the Federal Reserve’s William McChesney Martin Building on June 12, 2024 in Washington, DC. (Photo by Kevin Dietsch/Getty Images) (Kevin Dietsch via Getty Images)
Fed Forecasts released on June 12 suggested that authorities is expected to cut rates just once in 2024. However, a closer look at the so-called dot plot that aggregates these forecasts shows that moving major markets to two cuts in 2024 should not be a difficult task.
In June, seven Fed officials expected a rate cut in 2024, but eight predicted two cuts. The difference-makers? Four Fed officials who predicted no cuts this year.
Fed Chairman Jerome Powell has tried to downplay the importance of the dot plot over the past year as markets have tried to lock the central bank into ever more accurate forecasts. The absolute accuracy of the dot plot may remain unclear, but the direction officials think policy should go is clear.
The shift from March to June meant the need for three rate cuts went out the window.
But a plurality of Fed officials still saw two cuts as the most likely outcome this year. The recent string of labor market data should provide plenty of fodder for officials in the two-cut camp to bring more of their colleagues to their side.
The recent rise in the unemployment rate also raises the potential trigger of the Sahm Rule, which has preceded each of the last nine U.S. recessions.
The Sahm Rule shows that the economy has entered a recession if the three-month average of the national unemployment rate has risen 0.5% or more from the previous 12-month low. After Friday’s jobs report, the unemployment rate rose 0.36% from its 12-month low in the past three months.
‘Immaculate disinflation’
Ahead of Friday’s June jobs report, data from CME Group showed investors were pricing in a 75% chance the Fed would cut rates in September. Those odds changed little after the release.
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In a note to clients on Friday, JPMorgan economist Michael Feroli said most of the details of the jobs report “were a bit soft.”
Still, Feroli sees this report as outlining a “gradual loosening of a very tight labor market [that] is consistent with the Fed’s immaculate disinflation narrative and should give the FOMC confidence to cut rates sometime in the second half.”
Stocks on Friday had a somewhat muted reaction to the jobs data, but technology stocks led markets higher as the prospect of lower interest rates bolstered the outlook for high-growth names. Investors appear content, but not overly happy, with the prospect of “immaculate disinflation.” And after all, the The S&P 500 just gained 14.5% in the first six months of the year.
For investors interested in how economic data could shape the Fed’s path, next Thursday’s Consumer Price Index report will be the next catalyst.
And Friday’s jobs report also opens up the possibility that we could see labor market data overtake inflation readings as the main driver for the Fed.
Inflation, as Powell described last weekhas returned to a “disinflationary path.” With the Fed’s own forecasts suggesting it doesn’t see inflation actually hitting its 2% target before the end of 2026, monthly volatility appears to be built in.
Less tolerable, perhaps, is the current slowdown in the labor market. Last month, unemployment was forecast to be 4 percent by the end of this year and just 4.2 percent by the end of 2025. A continued rise in the unemployment rate, then, seems likely to create urgency at the Fed.
If Powell follows Dutta’s advice, the Fed chairman’s July 31 news conference will be a pivotal event for the central bank. Powell’s testimony before the House and Senate next Tuesday and Wednesday could also serve as a moment to signal a shift in thinking.
The annual Jackson Hole Symposium, held in late August, has often been used by Fed chairmen to unveil major policy changes over the years — though this year’s event may serve less as an occasion for Powell to test a policy shift and more as a moment to cement a rate cut just weeks later.
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