Jobs Report Will Aid Federal Reserve in Deciding Interest Rate Cuts

Friday’s monthly jobs report is poised to be a crucial moment for both the economy and the Federal Reserve.

If the report indicates weak hiring for August and a rise in the unemployment rate—similar to the unexpectedly low figures released for July—concerns about a faltering job market could intensify. In this scenario, the Federal Reserve may consider an aggressive approach, potentially implementing a larger-than-usual half-percentage point interest rate cut in their upcoming meeting.

Conversely, if hiring shows improvement over July’s modest gain of 114,000 jobs, or if the unemployment rate falls from 4.3%—the highest it has been in three years, albeit still low compared to historical standards—the outlook would suggest stability in the labor market, despite signs of slowing. In this case, the Fed would likely opt for a more conservative quarter-point cut to its key interest rate, with further reductions anticipated in the coming months.

Each of these potential outcomes could significantly impact the remaining months of the presidential campaign. A disappointing hiring report could support former President Donald Trump’s assertions that the Biden-Harris administration is overseeing an economic downturn.

On the other hand, a stronger jobs report would provide Vice President Kamala Harris with evidence to argue that the job market is performing well, even as inflation rates have decreased from a four-decade high toward the Fed’s 2% target. Lowering the Fed’s benchmark rate could lead to reduced borrowing costs for various loans, including mortgages, auto loans, and credit cards.

This week, the two presidential nominees revealed contrasting economic plans, with Trump proposing a cut in corporate taxes to 15% and the elimination of taxes on tips and Social Security income. In contrast, Harris has pledged to enhance tax deductions for start-up companies while increasing the corporate tax rate to 28%.

Economists have speculated that the government will report an addition of 160,000 jobs for August, with the unemployment rate dipping to 4.2%. Since reaching a historic low of 3.4% in April of the prior year, joblessness has increased by nearly a full percentage point.

This rise in the unemployment rate primarily reflects an influx of individuals entering the labor force, including recent immigrants and new college graduates, many of whom have not secured jobs immediately and are thus categorized as unemployed. This context makes the unemployment increase less alarming, especially given that the current rate of layoffs is only slightly above pre-pandemic levels.

However, a slowdown in hiring often indicates potential layoffs, prompting the Fed’s policymakers to prioritize the health of the job market over continued inflation efforts.

Recent economic indicators have presented a mixed picture, making the upcoming jobs report crucial. Among the more comprehensive assessments released by the government, the Labor Department surveys roughly 119,000 businesses and government agencies along with 60,000 households each month to compile employment statistics.

On the downside, companies are posting fewer job openings, and the number of workers leaving their jobs for new opportunities has declined. In a robust job market, employees tend to leave for better-paying positions, but with fewer voluntary departures, the job market for those currently unemployed looks tighter.

“New graduates and returning workers are having an exceptionally hard time breaking into the job market,” said Daniel Zhao, the lead economist at career site Glassdoor. “For these individuals, it feels particularly dire as they struggle to get a foothold.”

The Fed’s Beige Book, a collection of anecdotal information from the 12 regional Fed banks, indicated that employers have become increasingly selective in their hiring during July and August. Additionally, a survey by the Conference Board highlighted a growing percentage of Americans who believe that finding jobs is becoming more difficult, which often corresponds to a higher unemployment rate.

Despite these challenges, consumer spending—a vital driver of the U.S. economy—showed considerable growth in July. Furthermore, the economy expanded at a strong annual rate of 3% in the April to June quarter.

Fed Chair Jerome Powell has expressed his desire to prevent further weakening of the job market. A notably poor jobs report could prompt the Fed to initiate a significant interest rate cut this month.

Later on Friday, Christopher Waller, a member of the Fed’s Board of Governors, is set to provide insights on the economic outlook in a lecture at the University of Notre Dame. As a key figure in the governing board, his comments may shed light on the Fed’s forthcoming decisions.

Some labor market experts suggest that substantial rate cuts from the Fed could encourage companies to ramp up hiring more quickly.

“Everyone’s in a bit of a holding pattern,” said Becky Frankiewicz, president of North America at staffing firm Manpower. “Everyone’s observing the mid-September meeting, waiting to see if they can start allocating resources and making investments.”