Mixed news on the US labor market: Unemployment rate falls, but hiring activity slows

The latest labor market report has calmed the few voices calling for the US Federal Reserve to make a massive interest rate cut later this month.

For Wall Street, it is currently a matter of tossing a coin whether the Fed will cut interest rates by half a percentage point or a quarter of a percentage point: As of 9 a.m. Eastern Time, investors saw a 51 percent chance of a half-percentage point cut, according to the futures market, compared to a 49 percent chance of a quarter of a percentage point.

US employers created 142,000 new jobs in August, a significant increase from the downwardly revised July figure, and the unemployment rate fell from 4.3% to 4.2%. These figures are not to be sniffed at and show that the American labour market is holding up, at least for the moment.

The bar was already high for the Fed to cut interest rates by a whopping half a percentage point at the end of its monetary policy meeting on September 18 – and it depended on a disastrous employment report for August.

While that hurdle was not met, it is certainly good news for American workers. A weakening labor market would mean lower borrowing costs, but that would also mean employers laying off workers.

“A weaker-than-expected employment report could support those favoring a 0.5% rate cut on Sept. 18, but the final word is likely not yet in sight,” Chris Larkin, managing director of trading and investments at E-Trade, said in a note on Friday.

“Currently, a 0.25 percent cut is the baseline scenario for a cautious Fed. In the meantime, markets are likely to be sensitive to other data that suggest the economy is slowing too much.”