Economists Anticipate Rate Cuts in September as Labor Market Cools

At a news conference this week, Federal Reserve Chair Jerome Powell reinforced economists’ expectations that officials might cut interest rates at their next meeting in September — a highly anticipated move that would have major ripple effects. 

Such a move would come at a time when some experts believe inflation is easing, and when the labor market is displaying early signs of cooling. 

The Wall Street Journal reports that following the Fed’s two-day meeting, Powell suggested that a rate reduction is increasingly probable, stating, “The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate.” This would likely boost the labor market from potential weak spots while benefiting commercial lenders from a better inflation outlook. 

ING reports that the decision to hold rates steady at a range between 5.25% and 5.5% this week — a two-decade high — was unanimous. Investors now expect an initial rate cut of a quarter-percentage-point in September, followed by additional cuts later in the year. 

Recent economic indicators show that the employment cost index rose only 0.9% in the second quarter. CNBC reports this is below the previous quarter’s 1.2% increase. This lower pace of wage growth coincides with the Federal Reserve’s efforts to control inflation, and lower job opening rates. 

Data published by ADP reveals private payroll growth also slowed significantly, with just 122,000 jobs added in July — the smallest increase since January and below economists’ forecast of 150,000 jobs.  

Powell’s observations reinforce the notion that the labor market no longer poses the same inflationary risks it once did. Lower wage growth and a cooling labor market align with the Fed’s efforts to control inflation. However, the slowdown in private payroll growth highlights ongoing economic uncertainties in the workforce.