Another jumbo Fed cut is coming by year-end with the US labor market weaker than many think, Citi economist says

The Federal Reserve isn’t finished with aggressive interest rate cuts this year, a Citi economist said on Monday.

According to Veronica Clark, deteriorating labor dynamics will force the central bank to cut rates by 50 basis points in December.

“We see this weakening labor market dynamic across a number of different data points: low hiring rate, low quit rates, new hours worked coming down,” she told Bloomberg TV. “This does feel like labor demand that is pretty soft.”

Her point has grown more evident after October’s jobs report underwhelmed expectations with only 12,000 jobs added. Though hurricanes and industry strikes made last month’s data an anomaly, October’s weakness pairs with a broader labor-market weakening.

Clark cited that big downward payroll revisions continue to undercut economists’ understanding of how strong the jobs market really is.

“We did get preliminary estimates of the benchmark revisions a couple of months ago. That implies payrolls are overstated by about 70k right now,” she said.

Clark’s outlook runs counter to the consensus on Wall Street that the Fed will roll out a slow and steady easing cycle. A strong September jobs report that saw a surprise unemployment decline, as well as moderating inflation, have given investors confidence that the economy has room to cut rates.

But Clark suggested that the jobless rate is unlikely to remain at 4.1% for long.

Though October’s unemployment rate stayed unchanged on a rounded basis, Clark noted that it was it nearly rounded to 4.2%.

“I do think this is kind of confirming that that drop in September doesn’t necessarily repeat,” she said, and added: “When you have such weak hiring, you would be inclined to think people will just stay unemployed for longer, and there’s that upward pressure on unemployment still.”

Clark expects that the Fed will lower rates by a quarter-point at its policy meeting on Thursday, as do a vast majority of investors.

However, no investor has yet priced in a half-point cut the following month, as Citi suggests will happen. Instead, CME FedWatch Tool data shows 82.8% odds of another quarter-point cut in December.