The Fed should be reasonably happy with this report in that it is consistent with their “soft landing” narrative. The economy is adding jobs, but the pace is slowing and slack is forming in the economy with a rising unemployment rate. This is prompting wage growth to cool, which should contribute to keeping inflation on the path to 2%.
The Fed doesn’t want to cause a recession if it can avoid it and would prefer to be able to move policy from restrictive territory to “slightly less” restrictive territory if the data allows. Certainly September is very much in play for a first Fed rate cut and those expectations will be boosted further if core CPI comes in at 0.2% month-on-month as expected next week. Our concern is that business surveys are pointing to intensifying weakness in the months ahead – both in terms of cooling economic activity and weaker job creation – and this may lead the Fed to cutting rates more rapidly. We look for three cuts this year versus the two cuts currently priced by markets with the Fed funds down at 4% by next summer.