Combined with recent data confirming a dramatic slowdown in job growth, this presents serious new challenges for the U.S. economy. In response, the Federal Reserve is moving to cut interest rates. August’s nonfarm payrolls report showed an unexpected slowdown, with just 22,000 jobs added. Consequently, the market’s outlook has changed completely. For the first time, analysts are betting that the Federal Reserve will chop rates. They’re looking for these cuts to happen at all three of this year’s remaining markups.
Remarkably, just a week ago, markets were betting there was a one-in-five chance for those cuts. The new labor market report has turned that thinking inside out. Traders are staring at every move and word from the Fed. They’re fully pricing in a 100% certainty that we will see at least a quarter-point reduction in interest rates at next week’s meeting. There is still a chance for a half-point cut, underscoring just how critical action must be.
The impact of the deepening job market has drawn concern from all quarters, including the White House. They have even gone so far as to call on the Federal Reserve to begin making rate cuts. A new survey conducted by the New York Federal Reserve shows that worker confidence has plummeted. This represents an all-time low in job security for workers. Many workers today say they would have a difficult time finding a new job if they lost their existing one.
The CME Group’s FedWatch tool, which gauges market-implied odds for Federal Reserve rate moves based on prices of 30-day fed funds futures contracts, confirms traders’ predictions for upcoming cuts. The tool indicates overwhelming support for the idea that the Fed needs to do something. This response is especially important given the slow labor market, which has persisted for the last 30 years.
Andrew Hollenhorst, chief U.S. economist at Citigroup, said that with that labor market data should be enough to shift Fed policy. He stated, “Had Fed officials had that data available in real time, policy rates would be lower today.” He stressed that the overall economic environment could justify an unusually large “jumbo half percentage point cut.” The FOMC meets September 16 and 17, with its decision announcement set for September 17.
Economic journalist Heather Long added her voice to the chorus of those fretting over the health of the labor market. “The U.S. economy barely has any jobs right now and it’s been that way for a long time,” she remarked, underlining the prolonged nature of the job crisis.
In light of these developments, financial institutions like Goldman Sachs have expressed that current reports provide “limited information about the current state of the labor market.” This ambiguity further adds to the Federal Reserve’s decision bottleneck as it maneuvers through competing economic pressures.
Karoline Leavitt, a political figure, criticized both the Bureau of Labor Statistics and Jerome Powell, chairman of the Federal Reserve, stating: “Much like the BLS has failed the American people, so has Jerome ‘Too Late’ Powell — who has officially run out of excuses and must cut the rates now.”
Markets are responding aggressively to these economic signals. As we end the summer of 2020, it’s obvious that the Federal Reserve’s actions will play a huge role in determining the shape of the U.S. economic recovery in the months ahead. The convergence of such tepid job growth with such a precipitous drop in worker tenor is sure to create immense pressure on policymakers to act decisively.