The outlook for U.S. interest rates remains unclear

U.S. employment data in August left both "hawks" and "doves" with some information for them to chew on and digest. This has cast a cloud of uncertainty over the Fed's policy path this fall. A 25 basis point interest rate cut on September 18 is almost a foregone conclusion, but what happens after that is much more complicated.

The U.S. Bureau of Labor Statistics announced last Friday (September 6) that 142,000 new non-farm jobs were added in August, and the unemployment rate was 4.2%. Optimists on the U.S. economy highlight that job growth has rebounded from weakness in July, while wage growth has been stronger as signs that the job market remains healthy, a concern for those worried about a recession. The cumulative number of non-farm employment in the first two months was revised downward by 86,000, and the unemployment rate increased sharply from 3.4% in mid-2023.

The ambiguous jobs report won't change the Federal Open Market Committee's (FOMC) preference to begin cutting interest rates at its Sept. 17-18 policy meeting, but it didn't provide much insight into what will happen next. There is so much clear information, but it does not indicate that the U.S. economy will definitely have a "soft landing," nor does it indicate that the job market is deteriorating rapidly and requires the Federal Reserve to take active response measures. Two more monthly employment reports will be released before the FOMC meeting on November 6-7.

Fed officials will also focus on August inflation data before the September policy meeting. The U.S. Bureau of Labor Statistics will release the August Consumer Price Index (CPI) on Wednesday (September 11), and the August Producer Price Index (PPI) will be released on Thursday (September 12).

Economists generally expect that the CPI will increase by 0.2% month-on-month in August, the same as the month-on-month increase in July, and the year-on-year increase will be 2.6%, lower than the 2.9% in July.

Unless the data does not meet expectations, this inflation report should show that U.S. inflation is continuing to decline towards the Fed's 2% target, but it is still some way away from 2%, and August inflation data will still be a batch of unpredictable data. Data that clearly answers any question.

Economists at Deutsche Bank wrote on Friday: "Fed officials have made clear before that they are now more focused on downside risks to the job market, but the fight against inflation is not over yet.

"Fed officials will provide economic and interest rate forecasts in the latest Summary of Economic Projections (SEP) - or "dot plot" - released after the September meeting, the most watched of which will be their forecast for the federal funds rate. It is predicted that since July 2023, the Federal Reserve has kept the federal funds rate within the target range of 5.25%-5.50%.

Judging from the last "Summary of Economic Forecasts" released in June, the Federal Reserve expects to cut interest rates only once in 2024, by 25 basis points. However, considering the performance of economic data since the last "Summary of Economic Forecasts" was released, Previous interest rate cut forecasts were seriously out of date. The interest rate futures market currently projects the highest probability of the Fed cutting interest rates by a total of 100 basis points by the end of this year.

The "Economic Summary Forecast" released in September may predict more interest rate cuts than in June, but it is unlikely to be as many as the market expects. Also worthy of attention is the forecast of unemployment rate by Fed officials. Given the uncertainty about the outlook for the job market, these two key pieces of information may not be spelled out clearly in the Economic Summary Forecast.

Economic data released in October - employment, inflation and economic growth figures - will determine the Fed's next move.

Federal Reserve Chairman Powell said in a speech at the Jackson Hole Central Bank's annual meeting on August 23: "The way forward is clear, and the timing and extent of interest rate cuts will depend on future data releases, the changing outlook and the balance of risks."