After September rate cut, US interest rate outlook remains unclear

October economic data will determine the Fed's next move.

August U.S. employment data gave both hawks and doves something to chew on, casting a cloud of uncertainty over the Fed's policy path this fall. A 25 basis point rate cut on Sept. 18 is all but certain, but what happens after that is far more complicated.

The Bureau of Labor Statistics reported Friday that nonfarm payrolls increased by 142,000 in August and the unemployment rate was 4.2%. Optimists about the U.S. economy highlighted that job growth had rebounded from a weak July and that wage growth was strong as signs that the job market was still healthy, while those worried about a recession focused on the 86,000 downward revision of nonfarm payrolls in the first two months and a sharp rise in the unemployment rate from 3.4% in mid-2023.

The ambiguous jobs report will not change the Federal Open Market Committee's (FOMC) inclination to start cutting interest rates at its Sept. 17-18 policy meeting, but it does not offer much clarity about what will happen next, either that the economy is set for a "soft landing" or that the job market is deteriorating rapidly and requires an aggressive response from the Fed. Two more monthly jobs reports will be released before the FOMC's Nov. 6-7 meeting.

Fed officials will also focus on August inflation data before the September policy meeting. The Bureau of Labor Statistics will release August consumer price index (CPI) on Wednesday (September 11), and August producer price index (PPI) will be released on Thursday (September 12).

Economists generally expect the CPI to 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 of 2.6%, lower than 2.9% in July.

Unless the data performance does not meet expectations, this inflation report should show that US inflation is continuing to decline towards the Fed's 2% target, but there is still some way to go from 2%, and the August inflation data will still be a batch of data that cannot clearly answer any questions.

Fed officials have made it clear that they are now more focused on downside risks to the job market, but the work of fighting inflation is not over yet, economists at Deutsche Bank wrote on Friday.

Fed officials will provide economic and interest rate forecasts in the latest Summary of Economic Projections (SEP) - known as the "dot plot" - released after the September meeting. The most closely watched will be their forecast for the federal funds rate, which the Fed has kept in a target range of 5.25%-5.50% since July 2023.

The Fed expects only one rate cut in 2024, a 25 basis point cut, from its last SEP, released in June, although the previous rate cut forecast is seriously outdated given the performance of economic data since the last SEP. Interest rate futures markets currently price in the highest probability of a total of 100 basis points of rate cuts by the end of the year.

The Economic Summary Forecast released in September may predict more rate cuts than in June, but it is unlikely to be as many as the market expects. Also worth paying attention to is the Fed officials' forecast of the unemployment rate. Given the uncertainty of the job market outlook, the Economic Summary Forecast may not provide a clear explanation of these two key information.

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

Federal Reserve Chairman Powell said in a speech at the Jackson Hole Central Bank Annual Meeting on August 23: "The direction forward is clear, and the timing and magnitude of rate cuts will depend on future data releases, changing prospects and the balance of risks."

Therefore, investors still need to continue to pay attention to the performance of data this fall.