Economist: Weaker than expected labor market could allow Fed to cut interest rates by 0.5%

According to economists, since the revision of the US labor market report, the US Federal Reserve has every reason to lower the key interest rate at its next meeting in September.

“A weaker than expected labor market could pave the way for the Fed to cut interest rates by half a percentage point in September,” said Jeffrey Roach, Chief Economist for LPL Finance.

If employment growth slows, the Fed can effectively dampen wage pressures and thus inflation.

The Bureau of Labor Statistics revised down job growth between March 2023 and March 2024 by a total of 818,000 in benchmark revisions released Wednesday.

According to Roach, the sectors with the largest negative revisions were professional services and hospitality, while higher revisions are expected for transportation and warehousing.

“Not surprisingly, the leisure and hospitality sector is the most volatile,” he said. “The revision implies that job growth in the year to July was closer to 164,000 than the 209,000 recorded in the Aug. 2 jobs report.”

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The revised labor market report shows that the labor market is weak across the United States, not just in individual sectors, said Bill Adams, Chief Economist for Comerica Bank.

“It showed that the month’s weak job growth was not just seen in Texas, where Hurricane Beryl caused tremendous disruption to the economy in the greater Houston area and surrounding areas,” he said.

“Employment also declined in Missouri, and unemployment rose in a number of states on the East Coast, in the Midwest and in the High Plains.”

Comerica therefore expects the Fed to cut interest rates by a full percentage point between now and the end of January 2024, at meetings in September, November, December and January, with each cut being made by a quarter of a percent.

“Financial markets are calculating that the Fed will cut interest rates a little more between now and January,” he said.

The revised labor market report does not change the fact that the US economy is still doing quite well, said Robert FrickCorporate economist at Navy Federal Credit Union.

“The revisions are no surprise, as estimates were for a million fewer jobs,” he said in a note seen by Bloomberg. “This does not challenge the assumption that we are still in an expansion phase, but it does signal that we should expect more subdued monthly job growth and put additional pressure on the Fed to cut interest rates.”

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