The Federal Reserve will lower its key rate by a modest quarter-point and further rate cuts will follow

The monthly employment data on Friday will probably be a turning point for the Federal Reserve and the economy. Worries that the job market is faltering would increase if it turns out that hiring was sluggish in August and that the unemployment rate increased, as was the case with the surprisingly disappointing statistics for July. When the Fed meets later this month, it may then try to implement a stimulus package that includes a larger-than-usual half-percentage-point interest rate decrease.

On the other hand, it would indicate that the job market is still steady but slowing if hiring increased from July’s meager gain of 114,000 or if the unemployment rate decreased from 4.3%, the highest level in three years but still being low by historical standards. With more rate reduction to come in the next months, the Fed would likely reduce its benchmark rate from its 23-year high by a more moderate quarter of a point.

The last two months of the presidential campaign might be influenced by any result as well. The previous president Donald Trump’s accusations that the Biden-Harris administration has been responsible for the economy’s decline would be strengthened by yet another weak hiring report.

A more positive report, however, would provide Vice President Kamala Harris with proof that the labor market is still expanding even as inflation has decreased from a high that lasted four decades to levels close to the Fed’s objective of 2%, perhaps leading to rate cuts. Eventually, decreased borrowing rates for a variety of consumer and corporate loans, such as credit cards, auto loans, and mortgages, will result from reductions in the Federal Reserve’s benchmark rate.

In addresses this week, the two contenders for president presented opposing economic platforms. Trump pledged to remove taxes on gratuities and Social Security income, as well as to reduce corporation taxes to 15%. Harris pledged to raise the corporation tax rate to 28% and increase the tax deductions available to startups.

According to economists’ estimates, the government will announce on Friday that, in August, companies created 160,000 new jobs, bringing the unemployment rate back to 4.2%. Since April of last year, when it was at a half-century low of 3.4%, the unemployment rate has increased by over one full percentage point.

The majority of the increase in the unemployment rate, however, is due to a surge in the number of individuals entering the workforce, particularly recent college graduates and immigrants, who were listed as unemployed because they were unable to find employment right immediately. Because of this, the rise in unemployment is not as alarming as it would be if it were the result of widespread layoffs. In fact, the rate of layoffs has scarcely increased from pre-pandemic levels.

However, slower hiring rates often signal layoffs, which is one of the reasons why officials at the Fed are now more concerned with maintaining the strength of the labor market than they are with containing inflation.

Because of the inconsistent recent economic statistics, the employment report—one of the government’s most thorough economic snapshots—becomes even more significant. To gather information on employment, the Labor Department polls around 60,000 households, 119,000 enterprises, and government organizations each month.

Conversely, fewer employers are posting job vacancies, and fewer employees are leaving for other options. Employees are more prone to leave a stable employment environment in search of new, better-paying positions. Reduction in quits indicates that fewer employment are becoming available for unemployed individuals.

“Returning employees and recent graduates are finding it very difficult to get hired,” said Daniel Zhao, head economist at the job website Glassdoor. “And so for those folks, it certainly feels even worse because they can’t get their foot in the door.”

Many companies seemed to have been pickier about who they recruited in July and August, according to the Fed’s Beige Book, a compilation of stories from the 12 regional Fed banks. Furthermore, according to a Conference Board poll conducted in August, the percentage of Americans who believe it is difficult to obtain a job has been growing, a pattern that is often associated with a higher unemployment rate.

Meanwhile, July saw a robust increase in consumer spending, which is the main engine of the US economy’s development. Additionally, the economy expanded in the April–June quarter at a strong 3% annual rate.

A especially dismal employment report might prompt the Fed to announce a significant rate decrease this month since Fed Chair Jerome Powell has made it plain that he does not want to see the labor market decline further.

Member of the Federal Reserve’s Board of Governors Christopher Waller is expected to speak at the University of Notre Dame later on Friday on the state of the economy. Waller, a powerful member of the board of directors, could be able to provide light on the Fed’s future plans.

According to some labor market analysts, significant rate reduction by the Fed would encourage some businesses to begin hiring sooner rather than later.

According to Becky Frankiewicz, head of Manpower’s North America division, “everyone’s in a bit of a holding pattern.” “Everyone’s watching that mid-September meeting, to free up and start spending.”