If the unemployment rate is 4.3%, Fed will cut by 50bps: Citi

Investing.com – Should the U.S. unemployment rate stay at 4.3%, the Federal Reserve is likely to implement a 50 basis points (bps) rate cut at its next meeting in September, Citi economists said in a Thursday note.

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

However, if the unemployment rate falls slightly to 4.2%, the Fed might opt for a smaller, 25bps cut—unless the labor market shows additional signs of weakness, such as softer payroll growth. Specifically, Citi points out that a 4.2% unemployment rate would need to be accompanied by payrolls growing by no more than 125,000 to justify the larger cut.

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

The bank also discussed other labor market indicators, such as the nature of unemployment and data from the Job Openings and Labor Turnover Survey (JOLTS).

A rise in permanent unemployment or an increase in layoffs would further support a more aggressive rate cut. The analysts project that the upcoming jobs report, which will be released a week before the Federal Open Market Committee (FOMC) meeting, will play a crucial role in determining the size of the rate cut.

Citi’s base view is that the unemployment rate will remain at 4.3%, alongside the addition of 125,000 new jobs. As such, they expect the policymakers to cut interest rates by 50bps at the next FOMC meeting.

Federal Reserve Chair Jerome Powell last week signaled that interest rate cuts are on the horizon, though he stopped short of specifying the exact timing or magnitude.

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

He emphasized that while the direction is evident, the specific timing and speed of rate reductions will be guided by incoming data, the changing economic outlook, and the balance of risks.