Even before the recent spike in volatility, July FOMC minutes indicated that a “majority of members” believed it was “probably appropriate” to lower the federal funds target rate on September 18th. However, “several” officials thought a rate cut was likely. Reductions at July meeting. Fed Chairman Jerome Powell made his position clear at the recent Jackson Hole meeting, saying, “The time has come to adjust policy. The direction is clear.”
At the moment, the market sees a 25bp rise on September 18th as a slight advantage. Still, if the number of employees falls below 100,000 and the unemployment rate rises to 4.4% or even 4.5%, Chairman Powell’s comments that “we do not seek or welcome further cooling of labor market conditions.” Based on this, it seems very likely that it will reach 50bp. Even if it moves by 25bp, there is still a chance it will reach 50bp at some point. Weakness in business surveys and hiring indicators suggests the Fed needs to move policy from the “restrictive zone” to neutral levels relatively quickly.
How quickly and to what extent it progresses will depend on the rate at which the job market deteriorates. So far, the rise in unemployment has been caused by growth in labor supply outpacing labor demand. However, full-time employment has declined year-on-year for six consecutive months, and as the chart above shows, households are feeling the slowdown. There is a clear recognition that jobs are becoming much harder to come by, and consumers may need to tighten their belts for some time. This risks the “soft landing” scenario quickly turning into something much weaker, requiring a more aggressive response by the authorities.
