News

A rebound in the job market in August that still showed signs of cooling is likely to keep the Federal Reserve on track to cut interest rates by a quarter percentage point this month.

The results: 142,000 jobs were created in the month of August, compared with economists' expectations for 165,000 and up from 89,000 in July that was revised down from 114,000. The unemployment rate ticked down to 4.2% from 4.3% in July.

With continued cooling in the job market and confidence that inflation is now dropping back toward the central bank's 2% target, two members of the Fed said Friday the time has come to cut rates but stopped short of telegraphing by how much.

"I believe the time has come to lower the target range for the federal funds rate at our upcoming meeting," Fed governor Chris Waller said in a speech at the University of Notre Dame titled "The time has come."

What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Meanwhile, in prepared remarks before the Council on Foreign Relations, New York Fed president John Williams said, “It is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate.”

Williams said this is a natural step and that interest rates can move down to a more “neutral stance over time.”

The central bank, which is set to meet September 17 and 18, is laser focused on the job market now, as the labor market has weakened. At the same time officials who were worried about inflation — the other half of the Fed’s dual mandate — are more confident inflation is cooling sustainably back to their 2% target.

Bets by investors on how much the Fed could cut rates at its next meeting, based on the CME Fed Watch tool, have fluctuated wildly all day from around a 50-50 chance the central bank could cut by a quarter or half a percentage point to greater odds — a nearly 60% chance — the Fed will cut by half a percent.

Fears swirled after a weaker-than-expected jobs report in July stoked recession fears and caused the central bank to shift greater focus toward the job market. The August jobs report confirmed the cooling trend and underscored that the sky isn't falling.

Fed governor Waller said the jobs report for August supports the story of ongoing moderation in the labor market.

“Today’s jobs report continues the longer-term pattern of a softening of the labor market that is consistent with moderate growth in economic activity," Waller said.

"While the labor market has clearly cooled, based on the evidence I see, I do not believe the economy is in a recession or necessarily headed for one soon," he added.

Still, Waller argues to maintain economic growth the Fed needs to start cutting rates.

Comments from Waller and Williams in favor of cutting rates now echo Fed Chair Jay Powell's statement in a speech in Jackson Hole, Wyo., on Aug. 23 that "the time has come for policy to adjust."

Powell also said then that the cooling in the labor market has been "unmistakeable" and added that the central bank does not "seek or welcome further cooling in labor market conditions."

Now, the question markets are grappling with is how big that first cut might be and how many cuts will ensue.

The rebound in jobs data reinforced the case for a quarter point cut. If there had there been further deterioration, a half percentage point cut would be likely on the table. However, if unemployment continues to rise, an argument could be made that the Fed should move more aggressively.

Waller said he sees a series of cuts and that "if subsequent data show a significant deterioration in the labor market, the FOMC can act quickly and forcefully to adjust monetary policy."

Williams and several other officials, including Atlanta Fed president Raphael Bostic and Philadelphia Fed president Patrick Harker, have also said they could cut rates faster if the job market deteriorates more suddenly.

Waller said he’s open-minded about the size and pace of cuts based on the data. If the data supports cuts at consecutive meetings or the need for larger cuts, then he said he would support that.

Also, Waller said he was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and he will be an advocate of front-loading rate cuts if that is appropriate.

Central bank officials will offer markets more specific insight into how they see the path for lowering rates for the rest of the year when they release their interest rate projections, known as the dot plot, at their policy meeting.

Former Cleveland Fed president Loretta Mester, who just retired from the interest rate setting committee at the end of June, has said she thinks three 25 basis point cuts are in order.