The Federal Reserve is widely expected to announce the first interest rate cut in September, with the latest employment figures solidifying this expectation. The recent rise in unemployment has raised concerns at the Fed, potentially leading to a larger rate reduction than initially predicted.
The Fed's mandate extends beyond controlling inflation to ensuring a stable labour market. The recent increase in unemployment is a worrying signal for the central bank, as Fed Chair Jerome Powell stated on Wednesday that officials want to avoid a significant weakening of the job market. While unemployment remains relatively low, its upward momentum has drawn attention.
This development has increased the possibility of a half-point interest rate cut in September. However, most economists and traders still anticipate a quarter-point reduction, according to the CME FedWatch Tool.
The Fed typically adjusts its policy decisions based on inflation and employment data. In the summer of 2022, when inflation reached a 40-year high, the Fed implemented three-quarter point interest rate hikes. Conversely, during the Great Recession, the Fed enacted several three-quarter point rate cuts.
With one more employment report scheduled before the Fed's September 17-18 meeting, a further rise in unemployment could prompt the central bank to implement more substantial interest rate reductions.