The report released by the US Department of Labor on Friday showed that non farm payroll employment increased by 142000 in August, significantly higher than July’s 89000, but lower than market expectations of 161000; The unemployment rate for the month decreased slightly by 0.1 percentage points to 4.2%, which is in line with expectations and the first decline in five months.
The Ministry of Labor also significantly revised down the employment data for the months of June and July. Among them, the number of non-agricultural employment in July decreased by 25000 to 89000, and the number of employment in June decreased by 61000 to 118000.
The addition of new job opportunities fell short of expectations, which means that the slowdown in economic growth may exceed expectations. Due to this concern, the US stock market fell across the board on Friday, and the technology sector suffered a bloodbath. The Dow Jones Industrial Average closed down 410.34 points, or 1.01%, at 40345.41 points; The S&P 500 index fell 1.73% to 5408.42 points; The Nasdaq index fell 2.55% to 16690.83 points.
Based on recent speeches by Federal Reserve officials, there is little doubt that the Fed will initiate its first interest rate cut in four and a half years at its policy meeting on September 17-18. However, it is uncertain whether the rate cut will be 25 basis points or 50 basis points.
After the release of the employment report, the futures market once tended to lower interest rates by 50 basis points, but then fell back to 25 basis points. On Saturday morning Beijing time, data from the Chicago Mercantile Exchange’s Federal Reserve Watch tool showed a 69% probability of a 25 basis point rate cut in September and a 31% probability of a 50 basis point rate cut; The probability of a cumulative interest rate cut of at least 100 basis points within the year is 89.9%.
Two Federal Reserve officials gave speeches after the release of the employment report. The data we have seen recently indicates that the labor market is continuing to weaken, but not worsening, and this judgment is crucial for the decisions we are about to make, “said Federal Reserve Governor Christopher Waller. Federal Reserve Board members are members of the Federal Open Market Committee (FOMC), commonly known as the “vote committee”, who have voting rights on issues such as interest rate hikes/cuts.
Waller did not explicitly mention a 25 or 50 basis point rate cut, but hinted that he tends to support a 25 basis point rate cut first. However, he later stated that if new data shows that the labor market is deteriorating, he would also be open to a significant interest rate cut.
The other official speaking was John Williams, the President of the New York Federal Reserve and one of the 12 members of the FOMC. Williams repeated in his speech the remarks made by Federal Reserve Chairman Jerome Powell at the Jackson Hole Central Bank meeting last month, stating that it was time to relax monetary policy, but did not comment on the magnitude of the rate cut.
From the previous interest rate adjustments by the Federal Reserve, 25 basis points is the norm, while adjustments of 50 basis points or greater are generally used in special or emergency situations. For example, in March 2020, at the beginning of the COVID-19, the Federal Reserve announced to cut the federal benchmark interest rate by 100 basis points to 0-0.25%. In 2022-2023, in response to rare high inflation, the Federal Reserve has raised interest rates by 50 or even 75 basis points multiple times, pushing the federal benchmark interest rate from near zero to the range of 5.25% -5.50%.
James Bullard, Dean of the Purdue University School of Business and former President of the St. Louis Fed, stated that he believes there will be a 25 basis point rate cut in September as the August employment data is roughly in line with expectations. Although the Federal Reserve may currently be in a somewhat unfavorable position, I believe it is not yet at the point where it needs to cut interest rates by 50 basis points
But many analysts have also warned that the labor market is cooling significantly, and if the Federal Reserve cuts interest rates too slowly, this situation will further worsen. Jason Price, head of investment strategy and research at wealth management firm Glenmede, said, “The labor market has not yet bottomed out, but the Federal Reserve has enough concerns to seriously consider a 50 basis point rate cut later this month
Seema Shah, Chief Global Strategist at Principal Asset Management, stated that for the Federal Reserve, a 50 basis point rate cut could reignite inflationary pressures, while a 25 basis point rate cut could trigger the risk of an economic recession. In such cases, the key is to determine which option carries greater risk. In a situation where inflation pressure is not high, there is no reason not to act cautiously and adopt a larger interest rate cut, “Shah said.
In addition, prior to the release of the employment report, renowned American economist and Nobel laureate Joseph Stiglitz stated at the Ambrosetti Annual Economic Forum held in Italy that regardless of the performance of the August employment data, the Federal Reserve should cut interest rates by 50 basis points at this month’s policy meeting. He accused the Federal Reserve of “going too far and too fast” in tightening monetary policy, which has made the inflation problem worse.
Stiglitz said that it was a mistake for the Federal Reserve to keep the benchmark interest rate close to zero for a long time after 2008. But later on, they began to raise interest rates significantly, which not only did not benefit the economy much, but may also exacerbate inflation
He pointed out that if we carefully study the sources of inflation, we will find that housing costs are an important factor. A significant increase in interest rates will lead to an increase in construction costs for real estate developers and a rise in purchasing costs for homebuyers, which goes against the goal of solving the housing shortage problem.
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