Market Analysis

Citi projects robust job growth and a 50 basis point rate drop from the Fed

Amos Simanungkalit · 02 Sep 202435.8K Views

According to Citi Research analysts, the U.S. job market remains robust despite signs of a slowing overall economy.

As the Federal Open Market Committee (FOMC) meeting in September approaches, Citi anticipates that the Federal Reserve will begin a rate-cutting cycle, potentially reducing rates by 50 basis points (bps) as soon as this month.

This expected action is influenced by recent employment data, which, while showing some moderation, still indicate strong job growth.

Citi analysts note that, despite broader economic challenges, U.S. job growth remains relatively stable. For August, Citi forecasts a modest increase of 125,000 in nonfarm payrolls, up slightly from July's 114,000. The unemployment rate is projected to remain steady at 4.3%, though it might dip slightly to 4.2%. This consistent job growth suggests that the labor market is not weakening as rapidly as some had feared.

The Federal Reserve’s reaction to the August jobs report will be crucial. Citi Research predicts that if the jobs report matches their expectations of 125,000 new payrolls and a 4.3% unemployment rate, the Fed will likely implement a 50bps rate cut at the September meeting.

This anticipated rate cut would address the perceived risks to the labor market, especially if job growth falls below 175,000 and the unemployment rate stays high.

The broader economic context also influences the Fed's expected actions. Consumer spending has remained strong, with a 0.5% month-on-month increase in July, partly driven by robust motor vehicle purchases. However, with the savings rate at just 2.9%, it's unlikely this level will persist if unemployment rises. A higher savings rate would necessitate a slowdown in spending.

Core PCE inflation, recorded at 0.16% month-on-month, supports expectations for a rate cut as inflationary pressures ease.

Citi Research suggests that a 50bps cut in September might be the start of a series of rate reductions by the Fed, contingent on further economic data, particularly from the labor market. Analysts also note that Chair Powell seemed open to a larger cut and might set the stage for one at Jackson Hole, stating there is "ample room" for reducing policy rates.