The August jobs report reinforces ‘waning vigor’ in the labor market and the Fed should deliver a big rate cut, JPMorgan says

The highly anticipated August jobs report points to the marked slowdown of the US labor market and should prompt the central bank to deliver a bigger rate cut, JPMorgan chief economist Michael Feroli said.

“The August employment report reinforced the sense of waning vigor in labor market activity,” Feroli said in a note following the August nonfarm payrolls report.

The report shows the US added 142,000 jobs in August, bringing the unemployment rate down to 4.2% from 4.3%.

Those numbers were in line with expectations and followed a surprise uptick in unemployment in July that triggered worries of a recession and sparked a steep market sell-off in early August.

Since then, analysts have expected the August jobs report to weigh heavily on the pace and depth of rate cuts from the Federal Reserve.

Investors see the highest odds for a 25 basis point cut, but Feroli says the need for a more drastic cut to curb the cooling labor market.

“We still think cutting 50bp at the September meeting is the right thing to do. Policy is restrictive, downside employment risks are growing, and upside inflation risks are ebbing,” Feroli said.

It remains unclear if the Fed will cut so much right off the bat, though, Feroli noted.

“Fed speakers agree that multiple cuts are warranted, though they haven’t openly endorsed catching up to the curve as soon as possible,” Feroli said. “So, while we are still calling for a 50bp cut at the next meeting as we think it’s good policy, we don’t have full confidence that the Committee agrees just yet.”

Speaking just after the jobs data was released, New York Fed president John Williams advocated for rate cuts, though didn’t indicate how steep he thought might be appropriate at this month’s meeting.

“The stance of monetary policy can be moved to a more neutral setting over time depending on the evolution of the data, the outlook, and the risks to achieving our objectives,” he said.

Fed Chair Jerome Powell also nodded to rate cuts at the Jackson Hole symposium last month. He said the central bank does not “seek or welcome further cooling in labor market conditions” in his comments.

Williams said the August jobs data is “consistent with what we’ve been seeing — a slowing economy and a cooling off in the labor market.”