US employment slump paves the way for imminent Fed rate cuts

In a striking signal of the economic landscape, David Rees, Head of Global Economics at Schroders, has weighed in on the ramifications of the recent US employment growth figures, which revealed a continued slump for August.

This development not only sets the stage for the Federal Reserve (Fed) to consider rate cuts later this month, but it also raises important questions about the broader implications for the US economy.

Despite the lacklustre employment data, Rees cautions against rushing into hasty decisions.

“The Fed will need to tread carefully,” Rees stated.

He drew attention to the fact that, while the employment numbers have been disappointing, other labour market measures remain robust.

Furthermore, projected changes to immigration policies are anticipated to constrain the supply of workers in the future, potentially complicating the recovery process.

The broader economic picture, however, appears to be one of gradual rebounding, especially as the most pressing uncertainties surrounding policy have begun to dissipate.

Analysts suggest that it may not be long before hiring rates start to rise again, signalling a potential shift in the economic momentum.

The insight from Schroders underscores a crucial point: the economy may be on the verge of an upswing, yet it must navigate the challenges presented by existing inflation rates and the evolving landscape of fiscal and monetary policy.

Rees noted that the twin approaches of monetary and fiscal stimulus in recent years have primarily set the stage for inflationary pressures rather than substantial real GDP growth.

With inflation proving to be a persistent concern, analysts are preparing for the likelihood that upcoming fiscal strategies may not yield the growth expectations many had hoped for.

In this light, market predictions suggesting that the fed funds rate could plummet to 3% next year seem overly optimistic, warranting a more cautious approach from investors and policymakers alike.

As the Fed gears up for its upcoming meeting, all eyes will be on the central bank's moves and the subsequent effect on the economy.

Given the combination of static employment growth and a resilient broader economy, the forthcoming decisions could have far-reaching consequences for fiscal strategy and consumer confidence moving into the final quarter of the year.

Closer to home,  Adrian Goslett, Regional Director and CEO of REMAX Southern Africa said that a lot will depend on how inflation performs and what the US Fed will do just days before the South African Reserve Bank's announcement.

“If inflation edged nearer to the SA Reserve Bank’s preference of 3%, this would keep hopes for a cut alive; a re‑acceleration, on the other hand, would firmly entrench a September hold. Similarly, if global markets cut their rates (and if the rand holds steady), this would make later Sarb cuts easier, but doesn’t necessarily force one in September,” Goslett said. 

For debt holders, the most prudent expectation is for rates to remain unchanged at 7.00% in September. “If inflation and the rand behave, the next 25 bps cut is more likely at a subsequent meeting (e.g., November) rather than next month,” Goslett further said. 

BUSINESS REPORT