Weak Payroll Report Boosts Odds of Larger Fed Rate Cut in September

Weak July payroll numbers increase the chance of a 0.5 percentage point rate cut by the Federal Reserve in September.

Fed funds futures compiled by the CME Group show a rise in the likelihood of a 0.5-point cut from 22% to 60.5%. Meanwhile, the chance of a 0.25-point cut fell from 78% to 39.5%.

Fears of a stronger economic slowdown emerged with higher-than-expected unemployment claims.

The ISM manufacturing activity index for July showed contraction. Lower-than-expected job creation in July and a rise in the unemployment rate from 4.1% to 4.3% rattled markets.

This caused a repricing in the US interest rate curve. The “Sahm Rule” predicts recessions using triggered thresholds.

When the three-month moving average of the unemployment rate exceeds the 12-month minimum by 0.5 percentage points, it triggers a recession warning. Claudia Sahm, a former Fed economist, created this method.

Capital Economics says the sharp slowdown in job creation and the rise in the unemployment rate make a September rate cut inevitable.

They note the “Sahm Rule” has not yet been triggered, but the data increases speculation. The consultancy highlights the creation of 114,000 jobs, much weaker than expected.

The labor force grew by 420,000, while household survey employment increased by 206,000. The participation rate rose from 62.6% to 62.7%.

The smaller 0.2% increase in average hourly earnings in July compared to June pulled the annual growth rate down to 3.6%. This indicates quickly dissipating labor market inflationary pressures.

Weak Payroll Report Boosts Odds of Larger Fed Rate Cut in September

Economist warn that the next question is whether a cut larger than 0.25 percentage points is scheduled for September.

He says the Fed backed away from its promise to adjust rates downward. Blitz emphasizes preventing a recession from starting.

The US economy faces significant challenges. The Federal Reserve now finds itself under pressure to consider rate cuts to avoid a recession.

The weak July payroll data and other negative economic indicators led analysts to revise their expectations. The possibility of more aggressive rate cuts is gaining traction.

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