September: The 'Month of Rate Cuts' Arrives with 'Small Cut' Likely Due to Gradual Employment Easing

As September begins, the U.S. economy is poised to shift from a high-intensity tightening phase over the past 2.5 years to a new monetary policy direction. 

As September begins, the U.S. economy is poised to shift from a high-intensity tightening phase over the past 2.5 years to a new monetary policy direction. Key indicators this month, particularly the August non-farm payroll report, are expected to determine the Federal Reserve's rate cut decisions. Given the gradual easing of the labor market, a 0.25% point 'small cut' by the Fed in September is increasingly likely.

1. September Rate Cut Expectations

September marks a pivotal point as the U.S. economy transitions from a stringent tightening policy to a new monetary policy stance. The crucial variables this month include the August non-farm payroll report and other job indicators, which are expected to guide the Federal Reserve's rate cut decisions. With concerns about economic slowdown shifting to expectations of a soft landing, there is a growing probability that the Fed will implement a 0.25% point 'small cut' in September.

2. Changes in the Labor Market

According to the U.S. Bureau of Labor Statistics (BLS), the August non-farm payroll report, scheduled for release on September 6, is anticipated to show an increase of 165,000 new jobs. This figure represents a significant rise from July's 114,000 new jobs. However, the average for the past three months is projected to be around 150,000, the lowest level since early 2021. The unemployment rate, which increased from 4.1% in June to 4.3% in July, is expected to slightly decrease to 4.2% in August.

On Wall Street, there is speculation that if non-farm payrolls fall below 100,000 or the unemployment rate rises above 4.4%, the Federal Open Market Committee (FOMC) meeting scheduled for September 17-18 might result in a 0.5% point 'big cut.' However, the current strong consumer spending suggests that a smaller rate cut is more likely.

3. Other Economic Indicators and Outlook

The U.S. Department of Commerce recently revised the second-quarter GDP growth rate upward from 2.8% to 3% annualized, reflecting stronger-than-expected personal spending. The Atlanta Federal Reserve's GDP Now forecast also upgraded third-quarter growth expectations from 2% to 2.5%. Additionally, the futures market currently reflects a 70% probability that the Fed will implement a 0.25% point rate cut in September. There is also a 70.1% chance that the Fed will execute at least one 'big cut' in its meetings in September, November, and December.

This week will see the release of several important employment indicators. On September 4, the Job Openings and Labor Turnover Survey (JOLTs) for July will be released. On September 5, the ADP's August private sector employment report and weekly initial and continuing unemployment claims will be disclosed. Economic indicators will also be released, including the S&P Global and ISM August Manufacturing Purchasing Managers' Index (PMI) on September 3, and the Fed's Beige Book on the same day.

September is set to be a crucial month for the U.S. economy and monetary policy. Changes in the labor market and various economic indicators will significantly influence the Federal Reserve's rate decisions. Observing these developments closely will be essential to understanding how these shifts might impact the market.