With the labor market continuing to cool, as shown by the June employment report, the Fed is likely to cut interest rates in September if next week's inflation data is supportive.
The unexpected increase in the unemployment rate from 4.0 to 4.1 indicates a continued softening of the labor market but does not signal an imminent recession. The increase in the unemployment rate is primarily due to an increase in the number of unemployed people, not an increase in people joining the labor force, and the participation rate is little changed from May. The widely used thumb rule, which has predicted recessions perfectly in the past, predicts a 50 basis point increase in the unemployment rate over the past year. In this report, it has increased by 43 basis points. However, the thumb rule may not work now as it has in the past, as the post-pandemic economy has repeatedly defied previous expectations. The employment report also showed that 206,000 jobs were created in June, slightly above expectations of 190,000, although it is worth noting that a revision of the April and May data showed that 111,000 fewer jobs were created than previously reported. Average hourly wage growth was 0.3% month-on-month (3.9% year-on-year), in line with expectations.
Today's employment report and the inflation numbers from the past two months put the Fed firmly on track for a September rate cut, but three inflation reports are due to be released before then. Fed officials have said over the past few months that the labor market has cooled enough to eliminate inflationary pressures that they will focus on inflation to guide policy. The next CPI report is due to be released on Thursday, July 11. If this report turns out roughly as expected, the Fed should be able to start preparing to begin cutting rates in September as early as its July 31 meeting. If inflation numbers are particularly weak next week, that doesn't rule out a July rate cut entirely, but it would seem too aggressive given a labor market that is not yet weak.
For home buyers and sellers, today's data further solidifies expectations of lower mortgage rates at the end of the year. However, we still live in a world of heightened uncertainty, as expectations regarding Fed policy can change rapidly depending on monthly inflation data and the increasingly turbulent road to the US presidential election in November.