A surprisingly weak U.S. employment report for July has shifted Wall Street’s confidence in a soft economic landing to near panic over an impending recession. This has led major firms to predict more aggressive interest rate cuts by the Federal Reserve this year.
The U.S. Labor Department reported on Friday that employers added just 114,000 jobs in July, significantly lower than expected. Additionally, the unemployment rate rose to 4.3% from 4.1% in June, signaling an unexpected decline in the labor market. This deterioration comes despite the Federal Reserve’s vigorous rate-hike campaign throughout 2022 and 2023, which had previously seen the labor market hold up surprisingly well.
The weak employment data prompted futures traders to adjust their expectations, now anticipating a half-percentage-point rate cut at the Fed’s upcoming meeting on September 17-18. Prior to the release of the jobs data, only a 25 basis point cut was expected for September. Current Fed funds futures predict the policy rate will end 2024 in the 4.00%-4.25% range, down from the current 5.25%-5.50%, where it has remained since July 2023.
The release of the jobs report had immediate and significant impacts on the financial markets. The three main U.S. stock indexes plunged by 2% or more, as investors reacted to the increased likelihood of an economic downturn. Concurrently, there was a notable shift towards safe-haven assets, with investors moving into Treasuries, which caused yields to drop sharply.
The sudden change in employment data has intensified concerns among economists and investors that the U.S. economy may be slowing more rapidly than previously anticipated. The combination of rising unemployment and slowing job creation suggests that the Federal Reserve’s efforts to manage inflation through aggressive rate hikes may now be tipping the economy towards a recession.
In response to these developments, market participants are closely monitoring the Federal Reserve’s upcoming decisions and communications. The central bank’s next steps will be crucial in determining the trajectory of the U.S. economy, especially in the context of balancing inflation control with economic growth and employment stability.
As Wall Street braces for potential economic challenges ahead, the focus remains on how effectively the Federal Reserve can navigate these turbulent times and whether further policy adjustments will be sufficient to stabilize the economy without triggering a deeper recession.
READ MORE: