Key Takeaways
- Friday’s employment report showed that employers added fewer jobs in June and that the unemployment rate rose to its highest level since late 2021.
- The cooling of the labor market has added to expectations that the Federal Reserve could start cutting interest rates as soon as September.
- Fed Chair Powell will speak before Congress twice in the coming week, and the first readings on June inflation will be released. Those events should provide clues on the possible timing of rate cuts.
The latest monthly U.S. employment report provided more evidence that the economy is cooling, boosting expectations that the Federal Reserve will cut its benchmark interest rate in the coming months.
The Bureau of Labor Statistics said Friday that U.S. employers added fewer jobs in June than the month before and that the unemployment rate rose to its highest level since late 2021.
The BLS also adjusted downward the jobs growth numbers for the previous two months, an indication that the Fed’s policy of high interest rates to slow economic activity and tame inflation is having its intended effect.
“Overall, (the) report is consistent with ongoing moderation in growth and inflation. Job gains are still not slowing as fast as consensus expectations, but the underlying pace is cooling,” Nomura economists said in a report Friday.
Markets Betting Rate Cuts Start in September
Stocks gained and Treasury yields fell following the release of the jobs data, as optimism that the US central bank could start cutting its fed funds rate, which is currently at a 23-year high, rose.
Traders are pricing in a 77% chance that the Fed will cut the benchmark rate at the September meeting of the Federal Open Market Committee (FOMC), according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. That compares with the 64% likelihood priced in a week ago.
“The June jobs report adds to evidence from other recent growth indicators that the Fed is likely sufficiently restrictive,” Deutsche Bank economists said Friday. “These data therefore boost prospects for a September rate cut, though that outcome requires continued evidence of moderating inflation over the coming months.”
“We continue to expect ongoing disinflation to make the case for two rate cuts this year, in September and December,” Nomura analysts wrote.
The Fed’s Balancing Act
Fed officials have said that progress is being made in the fight against inflation, but have also said they need to see more data confirming that price pressures are under control.
“We want to be more confident that inflation is moving sustainably down toward (the Fed’s annual target of) 2% before we start the process of reducing how tight our policy is,” Fed Chair Jerome Powell said last Tuesday during a panel discussion at a European Central Bank conference in Portugal.
The latest reading of the Fed’s preferred measure of inflation, the Personal Consumption Expenditures index, showed that inflation in the 12 months ending in May slowed to 2.6%.
Fed officials are leery of moving too quickly to cut rates and run the risk of reigniting inflation. At the same time, they are watching labor trends closely to ensure that the high rates aren’t causing damage. The Fed has a dual mandate to keep prices stable and to promote maximum employment.
“We have to balance the two, and given the strength in the economy, we can approach that carefully,” Powell said last week.
Fed Chair Testimony, June Inflation Data on Tap
Powell is scheduled to address the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday, where he’ll give an overview of current economic conditions.
Lawmakers will likely press Powell on the impact that high interest rates are having on the economy and about the timetable for cutting the fed funds rate, which affects costs on everything from mortgages to student loans.
Later in the week, the first official readings on inflation in June will be released.
The Consumer Price Index report, due Thursday, is expected to show that annual inflation moderated in June to 3.1% from 3.3% the month before, according to economists surveyed by The Wall Street Journal and Dow Jones Newswires. The Producer Price Index, to be released Friday, will give a view of inflation at the wholesale level.
“In his comments last week, Powell reiterated a number of points from the June FOMC meeting but skewed dovishly at times by suggesting the disinflation trend has resumed and that policy is restrictive,” Deutsche Bank said in its report. “Importantly, his testimony will come before the June CPI release, which will be more important for determining whether the Fed will cut rates before the election.”