The latest labor market report has calmed the few voices calling for the US Federal Reserve to make a massive interest rate cut later this month.
For Wall Street, it is currently a matter of tossing a coin whether the Fed will cut interest rates by half a percentage point or a quarter of a percentage point: As of 9 a.m. Eastern Time, investors saw a 51 percent chance of a half-percentage point cut, according to the futures market, compared to a 49 percent chance of a quarter of a percentage point.
US employers created 142,000 new jobs in August, a significant increase from the downwardly revised July figure, and the unemployment rate fell from 4.3% to 4.2%. These figures are not to be sniffed at and show that the American labour market is holding up, at least for the moment.
The bar was already high for a whopping half-percentage-point rate cut at the end of the Fed’s September 18 meeting – and it depended on a disastrous employment report for August.
While that hurdle was not met, it is certainly good news for American workers. A weakening labor market would mean lower borrowing costs, but that would also mean employers laying off workers.
“A weaker-than-expected employment report could support those favoring a 0.5% rate cut on Sept. 18, but the final word is likely not yet in sight,” Chris Larkin, managing director of trading and investments at E-Trade, said in a note on Friday.
“Currently, a 0.25 percent cut is the baseline scenario for a cautious Fed. In the meantime, markets are likely to be sensitive to other data that suggest the economy is slowing too much.”
