Soft US August Payrolls Data Puts Fed Under Pressure to Cut Rates

The cracks in America’s labour market are starting to widen. The August payrolls report, released by the Bureau of Labour Statistics last Friday, showed just 22,000 positions added, barely a third of what economists had pencilled in. It marked the weakest monthly reading since the pandemic shock and deepened concerns that the jobs engine is finally running out of steam.

The unemployment rate climbed to 4.3%, the highest since 2021. On the surface, that rise looked worrying. But a little scratch beneath the surface changed the story. The uptick came largely because 436,000 people entered the labour force, swelling the pool of job seekers. In other words, the increase reflected more people looking for work, not necessarily a wave of lay-offs.

For Wall Street, the weak hiring numbers did not arrive as a jolt out of the blue. Investors were already braced for softness. What the data did do was ignite rate cut expectations. Just  a month ago, traders saw zero chance of an outsized 50 basis point cut from the Federal Reserve. By Sunday evening, the CME FedWatch tool reflected an 8% probability on a half-point cut at the Fed’s next September 17 meeting, with a quarter-point reduction viewed as a sure-shot move.

The Fed’s benchmark rate is sitting around its highest in more than two decades in the aftermath of a policy tightening campaign aimed at pulling inflation back to 2%. With consumer price growth still running stubbornly above target, the Fed has been reluctant to signal easing too early. Yet, four straight months of faltering jobs growth may be enough to push policymakers off the sidelines.

The headline payrolls miss was not the only concern. Average weekly hours slipped to 34.2, signalling that employers are trimming shifts even when they keep staff. Wage growth cooled to 3.7% year-on-year, exactly as predicted, but still evidence of fading momentum. Combined with a rising participation rate, the picture is of an economy where more Americans want jobs, but businesses are cautious about hours and hiring.

That combination, analysts argue, is precisely the cocktail to nudge the Fed into easing its grip. “Softer payroll data has strengthened expectations of a rate cut in September,” noted Devarsh Vakil, head of prime research at HDFC Securities. “Markets are pricing a high probability of a reduction, with even a larger cut now being discussed.”

Meanwhile, the data revisions added another twist in the tale. June, initially reported as a 139,000 gain, is now recorded as a 13,000 loss, the first monthly decline since December 2020, when the pandemic had the economy under a chokehold. July’s tally was nudged up to 79,000, but the broader trend, even as it showcases faltering momentum.

With the Fed’s next monetary policy meeting lined up for next week, investors are now focused on the monthly inflation data to gauge the central bank’s probable policy trajectory.

A softer print would strengthen the case for a deeper cuts, however, stickier prices could complicate the calculations for the Federal Reserve.

For now, the message from August’s payroll data is clear, the US job engine is running out of ammunition, and the Federal Reserve will have little choice but to provide it with the push it needs, by cutting rates.