U.S. Unemployment Rate and Federal Reserve Rate Cuts

According to Citi economists, if the U.S. unemployment rate remains at 4.3%, the Federal Reserve is expected to implement a 50 basis points (bps) rate cut at its upcoming meeting in September.

“An unchanged unemployment rate would mean July could not be cast as an outlier distorted by weather,” they explained.

Should the unemployment rate decrease to 4.2%, the Fed may consider a smaller 25bps cut unless the labor market shows further weakness, like reduced payroll growth. Specifically, a 4.2% unemployment rate would need to coincide with payrolls increasing by no more than 125,000 to warrant a larger cut.

Citi noted, “With payrolls just having been revised down by an average of 68k per month, a reading like 125k might represent something closer to 55k new jobs.”

The bank emphasized other labor market indicators, such as the nature of unemployment and data from the Job Openings and Labor Turnover Survey (JOLTS). An increase in permanent unemployment or layoffs could further support a more aggressive rate cut.

The analysts predict that the upcoming jobs report, released a week before the Federal Open Market Committee (FOMC) meeting, will significantly impact the rate cut size.

Citi’s baseline expectation is for the unemployment rate to remain at 4.3% with the addition of 125,000 new jobs. Consequently, they anticipate a 50bps interest rate cut at the next FOMC meeting.

Last week, Federal Reserve Chair Jerome Powell indicated that interest rate cuts are approaching, though he did not specify exact timing or magnitude.

“The time has come for policy to adjust,” Powell stated during his keynote at the Fed’s annual Jackson Hole retreat.

He underlined that while the direction is clear, the timing and speed of rate reductions will depend on incoming data, the evolving economic outlook, and the risk balance.