Labor Market Weakness... Fed Expected to Cut Rates for First Time This Year Next Week

Employment Slowdown Continues for Fourth Month by Indicators… 94% Chance of 0.25 Percentage Point Cut

Further Cuts Expected Within the Year

Justice Department Appeals Court Ruling to Prevent Dismissed Governor from Attending FOMC

US President Donald Trump [Yonhap News Archive Photo. Redistribution and DB Prohibited]

(Seoul=Yonhap News) Reporter Hwang Jung-woo = As the Federal Open Market Committee (FOMC) meeting of the US central bank, the Federal Reserve (Fed), scheduled for September 16-17 (local time), approaches, the financial markets are operating under the assumption that the Fed will resume interest rate cuts.

According to the CME FedWatch Tool, as of 7 PM on the 11th, the federal funds rate (FFR) futures market is reflecting a 93.9% probability that the Fed will cut rates by 25 basis points (1 bp = 0.01 percentage point) at this meeting. A 50 bp cut has a 6.1% probability. There is no expectation of rates remaining unchanged.

Reuters reported that in a survey of 107 economists conducted from the 8th to the 11th, 105 predicted a 25 bp cut this month. This is an increase from last month's survey (61%).

Michael Gapen, chief US economist at Morgan Stanley, said, "The Fed has four months of evidence that suggests labor demand is weakening more persistently," adding, "Simply put, we are easing policy to support the labor market, disregarding current inflation."

In September of last year, the Fed resumed interest rate cuts for the first time in four and a half years and lowered rates by 75 bp by December. However, it has decided to freeze rates for five consecutive meetings this year. The Fed has maintained a cautious stance, opting to wait and assess the impact of the Donald Trump administration's tariff policies on the economy, including inflation.

However, a series of indicators have emerged showing that the 'strong labor market,' one of the key grounds for the Fed's judgment that it was in a "good position to wait," is rapidly weakening.

Non-farm payrolls in August increased by 22,000 compared to the previous month, significantly below the expert forecast of 75,000. While July jobs were revised slightly upward from a reported 73,000 increase to 79,000, June jobs were revised downward from a 14,000 increase to a 13,000 decrease. This marks the first job decrease since December 2020.

Previously, the July jobs increase announced on the 1st of last month was only 73,000 from the previous month. Simultaneously, the increases for May and June were revised down by 258,000 from a reported 291,000 to 33,000.

This trend of labor market cooling has persisted for four consecutive months.

Fed Chairman Jerome Powell [Yonhap News Archive Photo. Redistribution and DB Prohibited]

The initial jobless claims data released today was no different. In the first week of September, initial jobless claims were 263,000 on a seasonally adjusted basis. This significantly exceeded the market forecast of 235,000 and is the highest since the fourth week of October 2021 (268,000).

Inflation remains volatile. Some analyses suggest that the impact of tariffs is beginning to be reflected.

The core Personal Consumption Expenditures (PCE) price index for July, closely watched by the Fed, rose 2.9% year-on-year. While this met expectations, it is the highest rate since February (2.9%). It increased by 0.3% from the previous month.

The Fed uses the core PCE, which excludes volatile food and energy prices, as an indicator to assess progress towards its '2% inflation target.' Consumer Price Index (CPI) is also considered.

The core CPI for August, released by the US Department of Labor on the 11th, rose 0.3% from the previous month, maintaining the same level as the prior month. This also met expectations. It increased by 3.1% year-on-year.

However, the August CPI rose 0.4% month-on-month, exceeding the market forecast of 0.3% and showing a larger increase than in July (0.2%). A 0.4% increase is the largest since January (0.5%). Year-on-year, it rose 2.9%, an increase from 2.7% in July.

Daniel Hornung, former deputy director of the National Economic Council (NEC) under the previous Biden administration, told the Financial Times (FT) that a September rate cut appears almost certain, given that there is stronger evidence of a weakening labor market while tariffs are not having a significant impact on inflation.

Joe LaVorgna, an economic advisor to Treasury Secretary Scott Bessent, stated, "It's clear that the labor market is not as strong as people thought when President Trump took office in January," adding, "As the Secretary said, we need a much larger adjustment in interest rates."

Eyes Focused on the Fed [Yonhap News Archive Photo. Redistribution and DB Prohibited]

Current market expectations favor further interest rate cuts following the September reduction.

According to the CME FedWatch Tool, there is an 81.2% probability that the benchmark interest rate will be cut by 75 bp by December. Assuming a 25 bp cut this month, this suggests a forecast of an additional 50 bp reduction within the year.

Meanwhile, the US Department of Justice has appealed to an appellate court requesting that President Trump's decision to dismiss Federal Reserve Governor Lisa Cook be enforced, preventing her from attending next week's FOMC meeting.

This appeal comes after US District Judge Jia Cobb of the US District Court for the District of Columbia ruled on the 9th that Governor Cook could remain in her position as a Fed governor for the time being.

President Trump announced the immediate dismissal of Governor Cook from her position, citing allegations of "mortgage fraud" and exercising his authority under Article 2 of the Constitution and the Federal Reserve Act.

Governor Cook has filed a lawsuit challenging President Trump's dismissal.

Fed Chairman Jerome Powell and Fed Governor Lisa Cook [Yonhap News Archive Photo. Redistribution and DB Prohibited]

Additionally, there is a possibility that Stephen Myron, a White House National Economic Advisor nominated by President Trump to succeed Federal Reserve Governor Adriana Kugler, who resigned early, could attend this FOMC meeting.

If the Senate Banking Committee approves the nomination and the full Senate processes it as early as the 15th, he could attend the FOMC meeting scheduled for the 16th-17th.

President Trump continues to pressure Federal Reserve Chairman Jerome Powell for interest rate cuts and attempts to fill the Fed's board of governors with his allies.