The Federal Reserve has maintained interest rates at a two-decade high for approximately a year, awaiting further indications that inflation is moving towards the official 2% target. The latest report indicates a clear weakening in the job market, although the extent of this deterioration or stability is yet to be determined.
The increase in the unemployment rate to 4.1%, following over two years of it staying below 4%, signifies a rise in the number of unemployed Americans, leading to a decrease in demand within the economy. Job loss often results in individuals cutting back on spending or becoming more cautious with their expenditures. Given that consumer spending constitutes about 70% of the US economy, the recent softer spending data is noteworthy. The uptick in unemployment suggests a favorable environment for rate cuts, yet the uncertainty surrounding the potential sharp rise in unemployment poses a challenge for the Federal Reserve.
While Fed officials emphasize their commitment to combating inflation, which remains notably above the target, some have acknowledged a close monitoring of the labor market for any concerning signals that might prompt quicker rate cuts.
According to the futures market, September is currently seen as the most likely timing for the first rate cut on Wall Street. For this scenario to materialize, inflation must continue to moderate in the upcoming months, although it is not imperative for it to reach the 2% mark. Fed Chair Jerome Powell has indicated that they will not necessarily wait for inflation to hit the target before initiating rate cuts. However, if a slowdown in inflation coincides with a rise in unemployment, a plausible expectation would be the first rate cut occurring sometime in the autumn.
