Although the Federal Reserve has not yet reached its 2% inflation target, it has successfully tamed inflation from its historical peak of 9.1% year-over-year. The short-term pain of drastically increasing interest rates forced the economy and inflation downwards. Now, the focus has shifted to securing a soft landing without harming employment.
Based on current job numbers, it seems the Federal Reserve has won the battle. However, the August job revisions indicated an overestimation of more than 800,000 jobs, raising questions about the accuracy of the current job market data. Could unemployment be worse than reported? If we see worse-than-expected job numbers, will the market price in a 50 basis point reduction?
At the Jackson Hole conference, the Federal Reserve emphasized its focus on employment, signaling its commitment to maintaining a strong job market while aiming for a soft landing. This could suggest the possibility of a 50 basis point cut if job numbers disappoint. However, if job data surprises to the upside, a 0.25 basis point cut could also be on the table.
Given the recent job revision, which was grossly overestimated, can we trust an upward surprise in job numbers? I would be skeptical of strong job figures, especially considering the revision and the fact that manufacturing PMI is in recession territory. However, the market's reaction on Friday will be crucial.
We also cannot ignore the recession indicators that are heating up, such as the inverted bond yield curve and the 3-month job indicator of the Sahm Rule, which is also in line. While time will tell if a recession is on the horizon, these indicators will need to prove themselves again.
Conclusion:
The Non-Farm Payroll (NFP) report will be a cornerstone in determining whether the Fed opts for a 50 basis point or a 0.25 basis point move, which will, in turn, signal whether a soft landing is achievable.