U.S. Momentum Weakening - Fed Cut Likely Ahead

  • August’s labour market data are broadly consistent with expectations of a gradual cooling in the United States (U.S.) labour market conditions through year-end. The unemployment rate edged up to 4.3% in August, from 4.2% in July, its highest level since October 2021, placing it on track to reach Fitch’s year-end forecast of 4.5%.
  • The broader U-6 measure1, which includes discouraged workers and those working part-time for economic reasons, also rose, reaching 8.1% from 7.9% in July. Nonfarm payrolls increased by just 22,000 in August, a sharp deceleration from (the upwardly revised) 79,000 in July. This slowdown reinforces the narrative of a cooling labour market. Job openings fell by 176,000 in July to 7.2Mn, marking the lowest level since September 2024 and undershooting market expectations of 7.4Mn.
  • The continued softening of the labour market suggests that the Federal Reserve (Fed) is likely to lower the Federal Funds rate by 25bps at its upcoming meeting on September 17. Although Fitch expects that inflation will accelerate from 2.7% year-on-year (y-o-y) in July to 3.3% by December (partly due to tariff pass-through effects), the labour market appears to be deteriorating more rapidly than anticipated.
  • This development appears to have shifted the Fed's balance of risks away from inflation and toward concerns over a more pronounced slowdown in economic activity. This shift was reflected in Chair Jay Powell’s August 22 speech at Jackson Hole, where he noted that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
  • Powell’s remarks have contributed to a rally in risk assets, as markets increasingly price in a more accommodative policy path. Futures markets now fully price in at least a 25bps cut in September, bringing the policy rate to 4.25%. Moreover, markets currently price in an 80% probability of an additional cut before year-end. These market expectations are broadly aligned with Fitch’s baseline view, namely the anticipation of two rate cuts this year, beginning in September, with the federal funds rate reaching 4.00% by the end of 2025.

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1 "U-6" refers to the U.S. Bureau of Labour Statistics' broad measure of unemployment, which includes the total unemployed, plus all marginally attached workers (those who want a job but haven't looked for one recently) and all those who are working part-time for economic reasons but want to work full-time.

(Source: BMI, a Fitch Solutions Company)