All eyes are on Friday’s release of the US NFP for August, following Fed Chair Jerome Powell’s signal of concern over labour market weakness. July’s surprisingly weak jobs numbers were the catalyst for the market to price in a rate cut at the September meeting. The expectation is for the trend to hold. But an even weaker than anticipated result could open the door for an even larger rate cut.
Prior to the July data, Powell said before Congress that the Fed most likely would be cutting rates if it weren’t for the concerns that tariffs would cause a rise in inflation. At the last meeting, the FOMC argued that the jobs market was solid enough to keep rates elevated to try to drive down consumer prices. The July measures for CPI and PCE showed that the effects of tariffs on prices were not as significant as feared. Combine that with signs of a deteriorating jobs market, and traders have now become almost convinced that the Fed will resume its easing cycle.
What Are the Odds?
The market is pricing in over a 90% chance of a rate cut at the September meeting. The odds of an October rate cut are about 50-50, meaning that’s likely where the effect of the NFP will be felt. But there are a couple of less likely options that explain why the market isn’t entirely convinced of a rate cut in September.
It is possible to have a blow-out jobs report that could suggest the loosening of the jobs market isn’t as bad as thought. That could theoretically give the Fed a reason not to cut, especially if August CPI beats. That could be a drop in the unemployment rate, or a revision of prior data to the upside. After all, if the expectations are met, this would be the fourth consecutive increase in hiring, despite being well below historic trends.
What About a Bigger Rate Cut?
Currently, the market is not pricing in any chance of a 50-basis-point cut in September. However, some analysts have advanced it as a possibility if there is a terrible NFP report. For example, if July figures are revised lower and the August report is negative. This could move the market to start considering the possibility of a “jumbo” cut, and substantially weaken the dollar.
There is some precedent for this, given that the Fed cut rates by 50 bps last year after a large downward revision in NFP in the July 2024 report. However, it’s worth stressing that this outcome is quite unlikely. A result within the range of expectations could leave the market adjusting its odds of a rate cut for October, which could imply up to 75bps in total easing over the three meetings left in this year.
What to Look Out For
The consensus is for August NFP to come in at 75K, just slightly above the 73K of July. However, this would be below the 186K average for the prior year, indicating continued weakness in the market. The unemployment rate is projected to tick up to 4.3% from 4.2% prior.
What the Fed cares about is signs of loosening in the market that would imply the unemployment rate is rising above the full employment level. There isn’t a specific number that the Fed is targeting for unemployment in order to achieve its full employment level. However, the range is generally understood to be within 4-6%. The larger the increase in unemployment, the more likely the Fed is to consider rate cuts.
