US rate cut ‘on the brink’

US interest rates are set to be cut this month for the first time since Covid-19 struck more than four years ago, but speculation is mounting about how big the cut will be.

In a long-awaited report, the Labor Department said 142,000 jobs were created last month in the world’s largest economy.

That followed a downwardly revised increase of just 89,000 in July.

The increase in nonfarm payrolls in August was lower than the 160,000 analysts had expected, making it almost certain that the Federal Reserve will cut interest rates in the US on September 18.

That would be the first cut since 2020, when central banks around the world slashed borrowing costs to prop up economies during the coronavirus pandemic — only to raise them aggressively later to curb runaway inflation.

However, analysts said the latest employment figures provided little clarity on whether the Fed would cut rates by the usual 0.25 percentage point or opt for a more aggressive 0.5 percentage point cut.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said it was an “exciting decision”.

Currency and bond markets fluctuated wildly after the report, as investors grappled with what the Fed would likely do. A cut of 0.25 percentage points — or 25 basis points — would take interest rates from the current range of 5.25% to 5.5%, to between 5% and 5.25%. A cut of 0.5 percentage points, or 50 basis points, would take them back to between 4.75% and 5%.

“I think the market is really struggling with this because it’s really in the middle of what could be used to justify a 25 basis point or 50 basis point rate cut,” said Gennadiy Goldberg, head of U.S. rates strategy at investment bank TD Securities in New York. “It’s consistent with a September cut. The big question now is how big a cut is it?”

The Bank of England and the European Central Bank have already cut interest rates, fueling expectations that the Fed will soon follow suit. Speaking last month at the Jackson Hole Summit of central bankers in Wyoming, Fed Chairman Jerome Powell declared that “the time has come” to act.

But he gave little indication of how aggressive the Fed planned to be, with employment numbers seen as key to its decisions.

“It’s clear that the labor market is slowing and the Fed needs to act,” said Eugenio Aleman, chief economist at the Raymond James investment strategy group.

“But the sky is not falling, the ground is not shaking, and a 50 basis point rate cut will send the wrong signal to the market” that the economy is falling apart, he added.