Mixed Jobs Report Keeps Fed on Track for Rate Cuts: What the Experts Are Saying

A mixed August jobs report keeps the Federal Reserve on track to bring interest rates down from a 23-year-high, experts say, but it's still uncertain as to whether the central bank will cut by a quarter of a percentage point or half a percentage point. 

U.S. nonfarm payrolls expanded by 142,000 last month, the Bureau of Labor Statistics said Friday, or well below economists' forecast for the creation of 165,000 jobs. Over the past year, the U.S. economy created an average of 202,000 jobs per month. Additionally, the soft July jobs report was revised down by 61,000 jobs. Taken together, nonfarm payrolls for June and July were 86,000 lower than previously reported.

The unemployment rate, which is derived from a separate survey, fell to 4.2% from 4.3% the prior month.

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A weakening labor market puts increasing pressure on the Federal Reserve's rate-setting group, the Federal Open Market Committee (FOMC), to lower the short-term federal funds rate at the next Fed meeting. 

"August payroll data indicate risks are rising as the labor market is clearly softening, and the Fed needs to step in to cut off tail risks," writes Sonu Varghese, global macro strategist at Carson Group. "The report seals the deal for a September rate cut, but the big question really is whether the Fed goes big (by cutting 50 basis points) to get in front of rising risks."

Fed Chief Jerome Powell opened the door to a September rate cut when the central bank wrapped up its regularly scheduled two-day policy meeting on July 31. Powell took an even more dovish turn when he spoke at Jackson Hole in late August.

Market participants concerned about a resurgence of inflation tend to favor a quarter-point cut (25 basis points) to interest rates. Those who fear for the health of the economic expansion and believe the Fed is behind the curve argue for a half-point cut (50 bps).

Based on the reaction to the August jobs report, a quarter-point cut remains the betting favorite. As of September 6, futures traders assigned a 77% probability to the FOMC enacting a quarter-point cut, up from 60% a day ago, according to CME Group's FedWatch Tool. Odds of the Fed making a half-point cut at its next meeting dropped to 23% from 40% a day ago.

With the August jobs report now a matter of record, we turned to economists, strategists and other experts for their thoughts on what the data means for markets, macroeconomics and monetary policy going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.

August jobs report: The experts weigh in

"The August Employment report confirmed Jay Powell's message from Jackson Hole that the labor market has cooled considerably, and the direction of travel is clear. But the report was not definitive enough in my view to settle the 25 vs 50 basis point rate cut debate on Wall Street or on the FOMC. Yes, the labor market is cooling, but it's no reason to panic. We still expect a 25-basis point rate cut on September 18th." – Scott Anderson, chief U.S. economist at BMO Capital Markets

"More confusion, less clarity. Today's economic data is fuzzy and ambiguous, but we think that while the labor market isn't falling apart, the job picture is slowing, and the Fed will start cutting. The employment for the month of August offered a mixed bag of statistics that, when looking purely at the headline readings, suggest some sequential strength from the prior month. Payrolls were higher in August relative to July, and the unemployment rate moved slightly lower. Beneath the surface, however, job gains in July were revised lower implying some additional softness in the labor market relative to initial results. However, wage gains were a bit stronger than expected (which bodes well for continued consumer spending), and the number of hours worked increased (which implies ongoing stability in the labor market). Overall, this will support the Fed's recent declaration that it's time to start cutting, but also likely compel them to remain somewhat cryptic with respect to the amount and pace of rate cuts in the months ahead." – George Mateyo, chief investment officer at Key Wealth

"The 142,000 new nonfarm jobs was below expectations, but those expectations were likely too high. This may take some of the air out of the 50 bps rate cut trade. The Fed keeps signaling 25 bps in September and that is what seems likely to happen. There has been a lot of talk that the Fed is too late. The 142,000 new jobs, relative strength of the consumer, and stabilizing prices push against that narrative a bit even though the number was a bit below expectations. There is no crisis, and the Fed can be patient. We expect a rate cut in September, but they are likely to start the easy cycle with caution." – Scott Helfstein, head of investment strategy at Global X 

"Today's weak jobs report should solidify the case for a rate decrease this month by the Fed and may warrant additional policy easing if the trend continues. The economy continues to add jobs, but it has shifted into a lower gear and policymakers should take that as a call to action." – Eric Merlis, managing director and co-head of global markets at Citizens

"The employment report this morning was sufficiently mixed that our outlook is still for a 25-basis point cut at the September FOMC meeting. That's not to say a case for a 50-basis point move cannot be made, after all, NFP missed to the downside and there were revisions lower to the previous two months' reports. In addition, the JOLTS report showed a big drop in open jobs and increases in the jobs hard to get measures. But the headline unemployment rate dropped back to 4.2% and average hourly earnings came in a bit hotter than expected. The sum of all these parts is a picture of a labor market which is clearly weaker than it has been, but still positive overall. With economic growth still positive it would seem there is not enough to move the Fed to do more than 'normal' and cut 25 basis points. The need to reduce rates is clear yet the path of those cuts remains uncertain." – Steve Wyett, chief investment strategist at BOK Financial

"The size of the September Fed easing is now on a knife-edge. The partial unwind in August of July's slowdown in job growth and jump in the unemployment rate leaves the outcome of this month's Fed meeting finely balanced between 25 bps and 50 bps easings. Huge downward revisions to the last two month’s payrolls leaves net job creation in this report at just 56,000, more than 100,000 below the consensus. What's more, the continued tendency for initial prints to be revised lower, as the response rate for the establishment survey increases, casts doubt over August's tepid recovery." – Ian Shepherdson, chairman and chief economist at Pantheon Macroeconomics

"This morning's nonfarm payrolls report provided some relief, coming in near expectations and showing a tick down in unemployment. After last month's miss and the Fed's heightened focus on labor as inflation cools, a sharp rise in unemployment could trigger a deeper economic downturn, market selloffs, and more aggressive action from Powell. While other parts of the economy have slowed and conditions are indeed tightening, steady labor growth may still guide the economy toward a true soft landing." – Ben Vaske, senior investment strategist at Orion Portfolio Solutions

"The data was soft enough to make the Fed more dovish, but not weak enough to confirm recession fears. The job market is bending, but it's not breaking. We seem to remain on track for a soft landing. The bears aren't getting what they wanted. Cyclical areas like manufacturing and leisure are slowing as the Fed wanted, but healthcare is filling the gap. This economy is getting less cyclical, which could be an unexpected positive for an aging population." – David Russell, vice president of market intelligence at TradeStation

"After a weak July report that was revised to be even weaker, the August jobs report did little to reassure markets concerned about further softening in the labor market or settle the debate as to whether the Fed will need to cut rates by 50 basis points later this month. While August tends to be a quirky month for labor market data, I felt this report continued to support our view that while the pace of hiring is down markedly, labor markets are normalizing at a pace consistent with the Fed pulling off a soft landing. Productivity growth for the second quarter was revised up, mostly reflecting an upward revision to GDP growth – consistent with our view in the short term that the U.S. economy is working through a Great Normalization, which feels like an economy that is wading into a swamp, not falling off of a cliff." – Timothy Chubb, chief investment officer at Girard Advisory Services

"This morning's report continues a trend of weakening economic data. Downward revisions to prior months are common in a slowing economy. The most recent Job Openings and Labor Turnover Survey (JOLTS) report, released earlier this week, showed a continuing decline in job openings. Today's job data will likely cause the Fed to consider a 0.50% cut at its meeting later this month, though a 0.25% remains the most likely outcome in my view. I believe the Fed should cut by a full half percent given the signs of economic weakness." – David Royal, chief financial and investment officer at Thrivent

"Our base case remains that the Fed delivers three 25 bps cuts between now and year-end, although we acknowledge that risks skew towards a more aggressive path than that. After all, cutting by 50 bps this month isn't hard to justify: Powell made it clear that the Fed doesn't 'welcome' a weaker labor market, and this could be the opportunity to get in front of it as hiring slows. Favorable inflation data in next week's CPI report would bolster the argument. Without a clear signal from the August jobs data, markets will be kept on their toes heading into the September Fed meeting. The Fed gets to make the call between a 25 bps or 50 bps cut, and either is justifiable. Regardless, we're at the peak of the policy rate cycle." – Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management

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