Hiring Softened This Summer, Teeing Up Fed Rate Cuts
U.S. job growth rebounded in August from levels that were softer than initially reported this summer, leaving the Federal Reserve on track to begin a series of rate cuts when officials meet later this month.
The economy added 142,000 jobs, according to the Labor Department, an uptick from July data that sparked slowdown fears and jarred global financial markets. The unemployment rate in August ticked lower to 4.2%.
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In an additional sign that summertime hiring was weak, the government revised down its estimates for June and July job growth by a combined 86,000 jobs.
The latest report was heavily anticipated on Wall Street because a weak reading could have pushed Fed officials to begin a likely series of rate reductions this month with a larger half-percentage-point cut rather than a more traditional quarter-point cut. The headline figures in August likely weren’t weak enough to do that, but the negative revisions to reported job growth for June and July suggest the decision could still be a close call.
Traders chafed at the lack of direction, with the S&P 500 veering 1.7% lower Friday and notching its steepest weekly loss in 18 months. The yield on 10-year Treasurys slid to 3.710%, its lowest level since the middle of last year, while the global benchmark price of oil skidded to $71.06 a barrel, its cheapest price since 2021.
Friday was the last day Fed officials could speak publicly before a quiet period leading up to their next meeting on Sept. 17-18. Central-bank officials have generally tried to set expectations about coming decisions so they can avoid taking investors by surprise on the day they announce. On Friday, they seemed to leave their options open.
Fed officials who spoke after the release of the jobs report didn’t explicitly state a preference for the size of the first reduction. They implied that the economy wasn’t faltering in a manner that would demand a larger half-point reduction this month, but they didn’t explicitly rule out a bigger cut, either.
“The data that we have received in the past three days indicates to me that the labor market is continuing to soften but not deteriorate, and this judgment is important to our upcoming decision,” said Fed governor Christopher Waller.
Waller added that a sequence of cuts was likely to be appropriate and that he would be open-minded about accelerating the pace of those cuts if new data suggested the labor market was deteriorating.
Historically, the Fed has tended to raise or lower rates in smaller increments of 0.25-percentage-point, or 25 basis points. But officials hiked more to fight high inflation in 2022 and 2023, often in 50- or 75-basis-point increments. The increases pushed the benchmark rate from around zero to around 5.3%.
“I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate,” Waller said.
New York Fed President John Williams, a top ally of Fed Chair Jerome Powell, told reporters he didn’t have a view on the size of the Fed’s coming cut.
Chicago Fed President Austan Goolsbee said that to achieve a fabled “soft landing” that brings inflation down without a recession, the Fed couldn’t wait for signs of labor-market deterioration to accelerate rate cuts. “If you’re going to have a soft landing, you can’t be behind the curve,” he said in an interview.
The market expects Fed officials to lower rates several times this year, first at the meeting this month and then at the remaining meetings in November and December. But the size of the first cut will be closely watched for clues about the central bank’s broader strategy.
Powell signaled in a speech last month he was poised to respond forcefully to any further slowdown in the labor market. Slow-walking rate cuts now “would risk market turmoil and an ill-timed tightening of financial conditions” that could threaten a “fragile equilibrium” in the labor market, said Krishna Guha, vice chairman at Evercore ISI.
One option would be to conclude that softer hiring since the Fed’s last meeting, in late July, justifies a 0.5-point cut. Fed officials held rates steady on July 31 but might have cut by 0.25-point at that time if they had known about weak jobs numbers that were released two days later. That could make Fed officials more willing to cut by a half-point this month.
A second option would be to cut by 0.25-point in September, and then to signal several more cuts in quarterly economic projections that will be released at the meeting.
Because Friday’s report was “broadly in line with what was expected,” it should “build the case for 25 basis points at this meeting, with a signal that you’re going to continue at 25 basis points for the next couple of meetings as a baseline,” said James Bullard, dean of the business school at Purdue University.
While the Fed might be “a little out of position now, I just don’t think they’re far enough out of position to say that they’re going to go 50 basis points, which will set up an expectation that they would go very rapidly to neutral,” said Bullard, who was St. Louis Fed president from 2008 to 2023.
More-gloomy analysts warn that the job market is cooling in a fashion that will worsen if the central bank cuts too slowly.
“The bottom has not fallen out on the labor market at this point, but there are sufficient jitters for the Fed to take a hard look at a [0.5-point] cut later this month,” said Jason Pride, chief of investment strategy and research at wealth-management firm Glenmede.
Others think the economy is simply healing after the pandemic prompted firms to rapidly lay off and then rehire workers.
“We are in the no-recession camp,” said Alejandra Grindal, chief economist at Ned Davis Research. Slower hiring “could just be a sign of things returning to normal.”
August’s job gains were led by hiring in construction and healthcare. The labor-force participation rate held steady. Year-over-year wage gains ticked upward to 3.8%.
A month ago, the weaker-than-expected July hiring report rekindled fears of a slowdown and contributed to a global selloff that briefly thrust the record-breaking U.S. stock market into one of its most volatile periods in years.
The big question in recent weeks has been whether the summer jolt was momentary—perhaps a result of Hurricane Beryl curbing hiring—or evidence of a broader deceleration of the economy. Friday’s report didn’t definitively answer the question.
“There’s nothing in this report that would turn optimists pessimistic,” said Justin Wolfers, an economics professor at the University of Michigan. “Would it turn pessimists optimistic? I think the answer to that is no.”
Write to Nick Timiraos at [email protected] and David Uberti at [email protected]