Jobs growth to remain solid says Citi, expects Fed to cut by 50bps

Investing.com — As per analysts at Citi Research, the U.S. job market remains strong, even as the overall economy shows signs of slowing down.

As we approach the upcoming Federal Open Market Committee (FOMC) meeting in September, Citi expects that the Federal Reserve will initiate a rate-cutting cycle, with a potential reduction of 50 basis points (bps) as early as this month. 

This decision is expected to be driven by the latest employment data, which, while showing some signs of moderation, still point to robust job growth.

Citi analysts highlight that despite the broader economic headwinds, job growth in the U.S. remains relatively solid. For August, Citi forecasts a modest increase of 125,000 in nonfarm payrolls, a slight uptick from July’s figure of 114,000. 

The unemployment rate is expected to hold steady at 4.3%, although there is a possibility it could round down to 4.2%. This sustained job growth suggests that the labor market is not softening as quickly as some may have feared​.

The Federal Reserve’s response to the August jobs report will be critical. Citi Research expects the Fed to cut interest rates by 50bps at the upcoming September meeting if the jobs report aligns with their expectations of 125,000 payrolls growth and a 4.3% unemployment rate. 

This rate cut would be justified by the perceived downside risks to the labor market, particularly if job growth falls below 175,000 and the unemployment rate remains elevated.

The broader economic environment adds further context to the Fed’s anticipated actions. Consumer spending has remained strong, with a 0.5% month-on-month increase in July, driven in part by robust motor vehicle consumption. 

“But the savings rate at just 2.9% is unlikely to be sustained with unemployment rising. When the savings rate rises, spending will need to slow,” the analysts said. Core PCE inflation was recorded at 0.16% month-on-month, reinforcing expectations for a rate cut as inflation pressures continue to ease.

Citi Research analysts suggest that a 50bps cut in September could be the beginning of a series of rate reductions by the Fed, with additional cuts likely at subsequent meetings depending on economic data, particularly from the labor market. 

“Chair Powell sounded not only open to a larger-sized cut but also to laying the groundwork for one at Jackson Hole by saying there is “ample room” to reduce policy rates,” the analysts said.