The suspense of the Fed's rate cut in September may have to wait until the last moment to be revealed! The US stock market is more hopeful to see a 25 basis point cut

According to the financial news app Zhitong Finance, the latest situation in the US labor market indicates that the Federal Reserve may take an aggressive 50 basis point rate cut for the first time after starting the rate hike cycle in September. Following the release of weak non-farm payroll data, traders in interest rate futures have increased their bets on an aggressive rate cut. However, two important Federal Reserve officials did not explicitly support the 50 basis point rate cut during their speeches on Friday.

Overall, the latest non-farm payroll data has not resolved the significant debate in the market regarding the magnitude of the Fed's rate cut in September. After the release of a series of economic data including non-farm payrolls, both camps advocating for a 25 basis point rate cut as a normalization step and those advocating for a 50 basis point rate cut to boost the US economy have expanded. Based on the pricing of interest rate futures and bond markets, the expectations for a 25 basis point and 50 basis point rate cut in September are evenly split.

Nick Timiraos, a Wall Street Journal reporter known as the "Fed Whisperer," stated that the latest non-farm payroll data did not effectively resolve the rate cut debate. Currently, the pricing in the market for a 25 or 50 basis point rate cut is "split down the middle." These latest expectations imply that the suspense over how much the Fed will cut rates in September may only be revealed at the last moment - during the Federal Open Market Committee (FOMC) monetary policy meeting on September 17th to 18th.

However, the employment report has indeed heightened concerns in the market about a cooling US labor market, and worries about a US economic recession have significantly increased. This was also the logic behind the sharp drop in US stocks on Friday, with the S&P 500 index recording its worst weekly performance since March 2023.

The US stock market prefers a 25 basis point rate cut over 50 basis points

The August non-farm payroll data released on Friday showed that job creation by US employers in August was below the general expectations of economists, further indicating a noticeable cooling in the labor market recently, leading to the gradual strengthening of the camp betting on a 50 basis point rate cut.

For investors in the US stock market, an announcement by the Federal Reserve of a 50 basis point rate cut could potentially trigger a new round of sharp declines in US stocks. If the Fed chooses a 25 basis point rate cut in September, it is essentially equivalent to a "preventive rate cut," indicating a relatively optimistic outlook on the US economy by the Fed. A 25 basis point rate cut is more based on preventing the US economy from entering a recession. On the other hand, a 50 basis point rate cut largely indicates a relatively pessimistic view of the US economy by the Fed - that Fed officials may see significant signs of an economic recession, increasing the possibility of a self-fulfilling economic downturn. It also means that the starting point for the Fed's rate cut may not be the same as a "preventive rate cut," and at that time, the US stock market may be plunged into panic selling due to recession expectations.

The third key figure at the Federal Reserve - New York Fed President Williams, and Fed Governor Christopher Waller made speeches at different events after the release of the non-farm payroll data, acknowledging a moderation in the labor market. Despite this, Waller stated that he does not believe the US economy is currently in a recession or heading towards one, while Williams mentioned that the current labor market conditions are more "consistent with the strong labor market before the outbreak of the COVID-19 pandemic." However, Bullard made it clear that he is ready to support the labor market at any time, which is consistent with the remarks made by Jerome Powell, Chairman of the Federal Reserve, last month. Bullard also stated that "if subsequent data show a severe deterioration in the labor market," he will advocate for larger-scale actions.

Traders expect a rate cut of at least 25 basis points this month, but some traders are still betting that the monetary policy meeting of officials in Washington on September 17th to 18th will see a larger rate cut. After the non-farm payroll data was released, traders increased their bets on a 50 basis point rate cut by the Federal Reserve in September. The CME "FedWatch Tool" showed that the probability of a 50 basis point rate cut by the Federal Reserve rose to nearly 50% at one point, but the betting has since been reduced, with the current probability at 30%-40%.

There is no doubt that the Federal Reserve is making every effort to avoid an economic recession

"Has the employment data really reached the threshold for a 50 basis point rate cut? According to the Fed's past reasoning, the answer is no," said Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree. "But can you prove an effective rebuttal to the 50 basis points proposal, especially considering that the employment numbers for the past two months have been significantly revised downward? This is also a reasonable point of view."

In August, the seasonally adjusted non-farm employment in the United States increased by 142,000, below the expected 160,000. At the same time, the previous value was revised from 114,000 to 89,000, and the non-farm employment added in June was revised from 179,000 to 118,000; after the revision, the total added employment in June and July was 86,000 lower than the pre-revision. The US unemployment rate in August was recorded at 4.2%, in line with market expectations, reaching a new low since June this year, and decreasing for the first time in four months of consecutive increases.

Over the past three months, the average number of new hires in the United States has been around 116,000 per month, the lowest level since the peak of the COVID-19 pandemic in mid-2020.

Multiple signs indicate that employment in the United States is slowing down

As the Federal Reserve prepares to hold its most anticipated policy meeting in over a year, this may trigger a fierce debate among policymakers, not to mention Wall Street economists and investors in the $27 trillion US bond market, with the focus of the debate on the extent and scale of cuts needed in the coming months.

For Powell and his colleagues, the most critical issue is whether the slowdown in the US labor market could evolve into a severe economic recession—a result they are eager to avoid. As more and more Americans struggle to find work, it may mean that without strong income support, US consumer spending is about to enter negative growth territory, and a decline in consumer spending will undoubtedly have a serious negative impact on the US economy, given that 70%-80% of the components of US GDP are closely related to consumption Waller stated in his speech: "This batch of data no longer requires patience, but action." He added that he "is open to the scale and speed of rate cuts."

After the release of Friday's labor market data, interest rate futures traders initially raised the probability of a 50 basis point rate cut in September to 50%, but quickly pulled this probability back to around 30%.

The fluctuating trading around the probability of policy easing this month continues to keep bond yields well below the current policy range of 5.25% - 5.5%. The 2-year U.S. Treasury yield is around 3.65%, indicating that bond traders remain confident that the Fed will cut rates by about 2.4 percentage points before September 2025.

Some details suggest that the labor market still shows resilience

Some economists point out that some details in Friday's non-farm payrolls report, such as the decline in the unemployment rate and the unexpected increase in wage growth, indicate that the labor market overall still shows considerable resilience.

Gus Faucher, Chief Economist at PNC Financial Services Group, stated that the Fed "is not in panic mode, they believe the economy is still in good shape," and he continues to expect a 25 basis point rate cut by the Fed this month. "A larger rate cut may indicate that they are more concerned about the U.S. economy, which could be seen as a negative factor by the market. This may actually be detrimental to the macroeconomic goals that Fed policymakers want to achieve."

Minutes from the Fed's July meeting showed that "several" officials had seen sufficient reasons for a rate cut before the disappointing July employment data was released. Subsequently, Powell stated in a highly anticipated speech that he and his colleagues would neither seek nor welcome further cooling of the labor market conditions.

At the Jackson Hole Global Central Bankers' Conference in late August, Powell announced to global investors that the Fed's rate cut cycle is about to begin. In less than 20 minutes, Powell made the most explicit signal from the Fed on rate cuts, not only officially mentioning that "the time for monetary policy adjustment has come," implying that a rate cut cycle is imminent, but also hinting through various wordings that the Fed's future main task is to avoid an economic recession and ensure a soft landing for the economy.

Some analysts have cited these remarks and questioned whether the August non-farm payrolls report released earlier on Friday constitutes the kind of "cooling" that Powell is so eager to avoid. "I think there is sufficient reason for a 50 basis point rate cut. I think it will be a fierce debate," said Diane Swonk, Chief Economist at KPMG. "Whether they can get there really depends on how many FOMC voting members are willing to agree."

In addition to deciding on the latest interest rates, Fed officials will also release a new set of economic forecast data at the upcoming monetary policy meeting, as well as their forecasts for the appropriate path of interest rates over the next few quarters, known as the "dot plot" that global investors are focusing on. This will more clearly indicate how quickly officials want to lower the benchmark interest rate.

Williams stated in his speech on Friday that Fed officials can "shift policy towards neutrality over time based on changes in data, economic outlook, and risks to achieving goals" - a monetary policy stance that neither promotes nor restricts economic activity