Jobs Report to Influence Fed's Rate Cut Decision

The upcoming jobs report, scheduled for release on Friday, is set to play a crucial role in shaping the Federal Reserve's decision on the size of its interest rate cut later this month. Fed officials have hinted at an almost certain rate reduction at their mid-September meeting, as inflation appears to be resuming its slowdown after a surprising setback earlier this year. However, some officials are now more concerned about keeping interest rates at a two-decade high due to potential job market weakness.

The debate among Fed officials centers on whether to initiate the rate cut with a traditional quarter-percentage point reduction or to preempt undesired job market weakness with a larger, half-point reduction. The August employment report will be pivotal in influencing this decision. A strong jobs report could lead officials to begin the rate cut sequence with a quarter-point reduction, while a softer hiring report or an increase in the unemployment rate could signal a larger cut.

Friday also marks the final day for Fed officials to communicate publicly before the pre-meeting quiet period begins. New York Fed President John Williams and Fed Governor Christopher Waller are scheduled to speak Friday morning after the jobs report is published, providing a last opportunity to set expectations for the upcoming meeting.

Fed Chair Jerome Powell's statement in July that a half-point cut was not being considered came just days before jobs data raised concerns about a potential labor market chill. However, San Francisco Fed President Mary Daly noted that the July report was not a sign of weakening, and if temporary factors dissipate, the labor market remains in a healthy position.



The Fed, as a consensus-oriented institution, typically moves gradually when the economic outlook is uncertain, preferring quarter-point increments for rate changes. However, larger cuts of a half-percentage point have historically been implemented in urgent situations, such as the onset of the Covid-19 pandemic, credit market seizures, or notable cooling in manufacturing activity and the labor market.

Diane Swonk, chief economist at KPMG, argues that there is a strong case for a 50 basis point cut, as the labor market is not in recession but is showing signs of potential weakness. The jobs report will provide valuable insights into the current state of the labor market and help Fed officials make an informed decision on the size of the rate cut.

In conclusion, the upcoming jobs report will play a significant role in shaping the Federal Reserve's decision on the size of its interest rate cut later this month. The report's findings will help officials determine whether to initiate the rate cut with a traditional quarter-point reduction or to preempt potential job market weakness with a larger, half-point reduction. As the Fed continues to monitor the evolving economic landscape, the jobs report will provide crucial data to inform its decision-making process.