Wells Fargo believes Friday’s August jobs report offered something for both “the hawks and the doves” on the Federal Reserve’s monetary policy committee, adding that next week’s consumer inflation report will likely be the deciding factor in whether the central bank cuts its benchmark lending rate by 25 or 50 basis points.
The nonfarm payrolls data came in below expectations earlier in the day, with the Labor Department reporting employers added 142K jobs last month and the unemployment rate ticked lower to 4.2% from 4.3% in July.
Wall Street (SP500) slumped in reaction, while experts debated over the size of the Fed’s expected interest rate cut later this month.
“An especially strong or weak employment report could have crystallized the 25 or 50 bps rate cut debate for the FOMC’s upcoming meeting. Instead, today’s data have offered something for both the hawks and the doves on the Committee,” Wells Fargo Senior Economist Sarah House said in a note Friday.
“We have been projecting a 50 bps rate cut at the September FOMC meeting for the past month, and for now we are leaving that forecast unchanged. That said, neither outcome would surprise us at this point, and we will be listening to the remaining remarks from Fed officials before the black out period and waiting for Wednesday’s CPI report for final clues,” House added.
The labor market part of the Fed’s dual mandate has grabbed headlines over the inflation part recently, as the latter has moderated.
“Consumer price inflation likely picked up in August in a reminder that the road to restoring price stability will still have some bumps along the way,” House had said in a preview note Thursday. Wells Fargo expects the core consumer price index (CPI) rose 0.25% last month, which would keep the Y/Y rate unchanged at 3.2%.
“Headline inflation for August will likely offer further evidence that through the month-to-month moves, inflation’s progress is not going into reverse,” she said, adding that headline CPI last month is seen rising 0.2% to a Y/Y rate of 2.6%.
“A rate reduction at the FOMC’s upcoming meeting on September 18 looks all but certain, but the upcoming CPI report could serve as a tiebreaker between a 25 or 50 [basis point] cut if the August jobs report lands in the gray zone between clearly weak and clearly strong,” House said.
Some 69% of market participants expect the Fed to cut rates by 25 basis points later this month while 31% anticipate a 50 basis point cut, according to the CME FedWatch tool on Friday afternoon.
Wells Fargo’s House said a CPI print of 0.3% or higher could make hawkish FOMC members nervous about cutting and make a 25-basis point reduction “the compromise outcome.”
However, a 0.2% slide may make enough board members “comfortable” to cut 50 basis points “not because the labor market is falling apart, but because the significant progress on the price-stability side of its mandate no longer requires such a restrictive stance of policy,” she added.
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