Dive Brief:

• Initial claims for unemployment insurance during the week ended Aug. 17 rose slightly to 232,000 from the prior week, the Labor Department said Thursday, providing another sign of labor market softening and affirming signals from the Federal Reserve of a likely cut in borrowing costs next month.
• The cooling labor market “means this September we need to start the process of moving rates down,” Philadelphia Fed President Patrick Harker said in an interview with CNBC, while noting receding risks of persistent inflation. The jobless claims data is just one sign that “the labor market has definitely softened” since the pandemic.
• As the Fed seeks to meet its dual mandate of price stability and maximum employment, “the balance of risks is getting more equalized,” Harker said. “So we do need to take that more into account when it comes to the labor market.”

Dive Insight:

The news about jobless claims followed a Bureau of Labor Statistics release Wednesday indicating that U.S. payrolls in the 12 months ending in March may have grown 818,000 less than previously reported — yet another sign of a loosening labor market.

Early this month a worse-than-expected report on July payrolls sparked recession fears. The jobless rate rose last month to 4.3% from 4.1% in June, and payrolls expanded only 114,000, below forecasts and the lowest monthly increase this year.

Labor market weakness has fueled expectations that policymakers will reduce the federal funds rate at a scheduled Sept. 17-18 meeting. They have held the benchmark rate at a range from 5.25% to 5.5% since July 2023.

“Several” Federal Open Market Committee participants saw an argument for reducing borrowing costs at their most recent gathering on July 30-31, according to minutes of the meeting released Wednesday.

“The vast majority” of FOMC participants indicated that, if price pressures continued as anticipated, “it would likely be appropriate to ease policy at their next meeting” in September, according to the meeting minutes.

Since early 2022 policymakers have made jagged progress in curbing inflation to from the highest level in four decades to their 2% target. The consumer price index rose last month at a 2.9% annual rate — a three-year low.

“The sustained moderation in inflation in recent months and the tame CPI report for July provide ample room for the Fed to start its policy recalibration,” EY Senior Economist Lydia Boussour said in an email. “In fact, we continue to believe that a July rate cut would have been optimal.”

The FOMC minutes showed that most Fed officials have grown more concerned that the risk the job market will falter exceeds the prospect for a resurgence in price pressures, she said.

“There was a noticeable and dovish shift in the committee’s perception of the balance of risks as many participants noted that reducing policy restraint too late or too little could risk unduly weakening economic activity or employment while only several participants noted that removing policy restraint too soon could boost final demand leading to renewed inflationary pressures,” Boussour said.

The central bank will probably make three, 0.25 percentage point cuts to the federal funds rate by the end of 2024, and reduce the main rate by 1.25 percentage points next year, according to EY.

Fed Chair Jerome Powell is scheduled to deliver a monetary policy speech on Friday at an annual meeting of central bankers in Jackson Hole, Wyoming.