Size of US interest rate cut in question after mixed hiring data

Expectations on the size of an initial US interest rate cut swung following mixed data from a closely watched employment report on Friday.

Nonfarm payrolls increased by 142,000 in August, the US Labour Department reported on Friday, below the FactSet estimate of 165,000. The unemployment rate climbed down from 4.3 per cent to 4.2 per cent, in line with expectations.

The change in employment for July was revised down from 114,000 to 89,000.

With a September rate cut all but assured, Friday's job report was seen as crucial in determining whether the Federal Reserve would initially cut rates by 25 or 50 basis points.

Federal Reserve governor Christopher Waller suggested the central bank is leaning towards a quarter-rate cut during its September 17-18 meeting.

“I do not expect this first cut to be the last. With inflation and employment near our longer-run goals and the labour market moderating, it is likely that a series of reductions will be appropriate,” he said at the University of Notre Dame, in Indiana.

He also said he does not believe the economy is in a “recession or necessarily headed for one soon”. Still, he said he would be open to a larger rate cut if new data supports it.

“I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate.

Mr Waller's remarks echoed the urgency Fed chairman Jerome Powell expressed two weeks ago, saying recent data “no longer requires patience, it requires action”.

Future markets priced in a probability of a 25-basis point rate cut at roughly 70 per cent following Mr Waller's remarks, CME's FedWatch tool showed.

Mahmoud Alkudsi, senior market analyst at ADSS, said the downwards revision cleared any “ambiguity” about the size of the mid-September rate cut, saying a 50-basis point cut is “firmly on the table”. A 50 basis point cut is seen as a more urgent action by the Fed to shore up the labour market.

Meanwhile, advisory firm LHMeyer said it maintains a baseline scenario of a 25-basis point cut.

In recent weeks, Fed officials have indicated they are more focused on ensuring the jobs market remains healthy now that inflation is seen as sustainably moving towards their 2 per cent goal.

Mr Waller said it was important to begin cutting rates this month, warning that failure to do so would further weaken the labour market.

New York Fed president John Williams said shortly after the release that the Fed's dual mandate of price stability and maximum employment have come into equilibrium.

“It is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate,” he said at the Council of Foreign Relations in New York.

US Fed chief Jerome Powell hints at interest rate cuts

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Mr Williams said Friday's report “is consistent with what we’ve been seeing – a slowing economy, a cooling off in the labour market”.

He did not offer any insight into the size of the Fed's initial rate cut.

Cracks in the jobs markets have begun to appear. Last month's jobs report came in weaker than expected, coupled with a surprise sharp rise in employment. Economists credited this rise with more people entering the workforce rather than permanent layoffs.

Mr Powell has said any further unexpected weakening in the labour market would be “unwelcome”.

Additional data released earlier this week supported the notion of a softening jobs market.

A separate report from the Labour Market released on Wednesday showed job openings fell to their lowest level in more than three years in July. The Job Openings and Labour Turnover Survey showed available openings fell to 7.67 million at the final day of July.

The Fed's Beige Book of economic conditions on Wednesday also showed activity was flat or declining across most regions in the US.