Quick Overview

  • The U.S. Department of Labor reported Thursday that initial jobless claims for the week ending August 17 rose slightly to 232,000 from the previous week's figure, another sign of further cooling in the labor market and reinforcing signals that the Federal Reserve may cut interest rates next month.
  • Philadelphia Fed President Patrick Harker said in a CNBC interview that the cooling labor market "means we need to start the process of cutting rates in September," noting that the risk of persistent inflation is fading. The jobless claims data is just one of the signs indicating that the labor market has "clearly softened" since the pandemic.
  • Harker said that as the Fed seeks to achieve its dual mandate of price stability and maximum employment, "the balance of risks is becoming more balanced," "so we really need to consider that more when we think about the labor market."

In-Depth Analysis

Before the jobless claims data was released, the U.S. Bureau of Labor Statistics reported Wednesday that U.S. nonfarm payrolls may have grown by 818,000 fewer jobs than previously reported in the 12 months through March, another signal of labor market loosening.

Earlier this month, the July nonfarm payrolls report missed expectations, sparking recession concerns. The unemployment rate rose to 4.3% in July from 4.1% in June, and nonfarm payrolls increased by only 114,000, below expectations and the smallest monthly gain this year.

The weakness in the labor market has strengthened market expectations that policymakers will lower the federal funds rate at their September 17-18 meeting. The Fed has kept its benchmark rate in the range of 5.25% to 5.5% since July 2023.

According to the minutes of the July 30-31 meeting released Wednesday, "several" Federal Open Market Committee (FOMC) participants believed there was a case for lowering borrowing costs at the most recent meeting. The minutes showed that the "vast majority" of FOMC participants said that if price pressures continued as expected, "it would likely be appropriate to ease policy at the next meeting (September)."

Since early 2022, policymakers have made uneven progress in bringing inflation down to the 2% target from four-decade highs. The July consumer price index rose 2.9% year-over-year, a three-year low.

"The continued easing of inflation in recent months, along with the benign July CPI report, provides ample room for the Fed to begin policy recalibration," Lydia Boussour, senior economist at EY, said in an email. "In fact, we still believe a rate cut in July would have been the best choice." She noted that the FOMC minutes showed most Fed officials are increasingly worried about the risk of the labor market stalling, more than the possibility of price pressures reigniting.

Boussour said: "There has been a clear dovish shift in the Committee's view of the balance of risks, with many participants noting that reducing policy restraint too late or too little could risk unduly weakening economic activity or employment, while only a few participants mentioned that removing policy restraint too early or too much could boost final demand and lead to a resurgence of inflationary pressures."

According to EY forecasts, the Fed may cut rates three times by 25 basis points each before the end of 2024, and lower the key rate by 1.25 percentage points next year.

Fed Chair Jerome Powell is scheduled to deliver a speech on monetary policy Friday at the annual central bank symposium in Jackson Hole, Wyoming.