Navigating the Labor Market: Insights Ahead of the Fed’s September Meeting

Let's get to the big story breakdown.

It is a big week for labor market data, non-farm payrolls for August on tap at the end of the holiday shortened week, and this does come ahead of the preliminary annual benchmark revision of non-farm payrolls by the BLS next Tuesday.

Now the countdown is on for the September Fed meeting at the Jackson Hole gathering.

Powell opened the door.

To rate cuts.

Well joining me here at the New York Stock Exchange is James Knightley, chief international economist at ING.

James, great to have you back.

Welcome back.

Thanks for joining me.

Well, first and foremost, we know that the countdown is on to the Fed meeting on September 16th to the 17th, so two weeks to go until that rate decision.

How are you cutting through all the noise?

Yeah, I mean, so we know that we've already got 2 voters for a 25 basis point cut, so that's pretty much in the bag.

We've got Stephen Morin.

He's appearing.

He's got his testimony.

He's got his his confirmation hearing tomorrow, so he's likely to be on the committee as well.

He'll certainly be voting for a rate cut.

But of course, as you say, we've got these jobs numbers coming up on Friday.

They're expected to be not disastrous but pretty subdued, and you know our concern and I think most economists' concern is that if you wait until the jobs market is really weakening and unemployment's climbing, you've left it too late.

So you've got to try and get ahead of this a little bit.

And if you do truly believe that tariffs are a one-off step change, they're not going to be something more permanent, something more persistent in inflation.

Then it perhaps does justify just a preemptive early rate cut coming through.

So that's what that's the way we're looking at it, a subdued but not terrible jobs report on Friday, and that really sort of cements expectations for a 25 basis point cut in two weeks' time.

Yeah, and James, it's an interesting week because we have Labor Day on Monday and it is the holiday short.

So tomorrow we get a lot of data including ADP.

We get Jolt later and we also will be paying attention to other figures including weekly jobless claims.

But as you mentioned, there's a lot of uncertainty regarding tariffs as well.

So as an economist, how are you factoring in the latest developments?

Yeah, well, I'd say that in terms of the jobs market we've got a cooling but not collapsing story, so hiring is certainly softening, but we're not seeing the firings as yet.

So that sort of story, it's just sort of a more of a gradual slowdown and that's why we say the Fed perhaps is going to try and get ahead of this a little bit just just to prevent the worst case scenario of unemployment climbing.

But in terms of the tariff story, yeah, I mean, I think it will certainly lead to some near term price increases.

Will it lead to something more permanent?

Well, people sort of look at the 2021, 2022 experience when we had a supply chain shock, you know, the COVID, post-COVID reopening, and the Fed told us don't worry, inflation is going to be transitory.

It wasn't.

It hit 9%.

So I think there is a lot of caution in the Fed that they don't want to get it wrong again.

But I would argue that we've got three key factors that are very different between now and what we saw a few years ago.

Firstly, remember, oil prices tripled between 2021, 2022.

They're falling today.

Secondly, house prices rocketed.

They jumped 50%.

Between 2020 and 2023, today house prices are falling, rents are cooling, so that story's not there.

And then thirdly, of course, the jobs market, as you say, it is looking more subdued.

We don't have the wage pressures.

Wages were rising 6% 2 or three years ago.

Today they're rising close to 3%.

So those Tree factors wages, housing, and energy prices are not there.

So I think personally right now we're looking at a period of near term price pressures from tariffs, but not real permanent inflation, and we've got a cooling jobs market.

It perhaps makes sense for the Fed to start moving policy closer to neutral.

And James, next week we will be getting a better reading of inflation here in the US because we have PPI as well as CPI figures, but we also saw revision to quarterly growth here in the US in terms of GDP and that reading was very interesting below the surface.

So what are you seeing and what are your growth expectations for the rest of 2025?

Yeah, so I mean, as you say, GDP got revised up to 3.3%.

On the face of it, a really good story, but we've got to remember a lot of this is the volatility tied to trade.

Trade was a huge drag, depressing growth in the first quarter because of the tariffs and the volatility and the trade flows.

It correspondingly surged in the second quarter.

So I think we've got to do is take those two quarters together.

Average that's about 1.6%.

Which is OK, but it's not fantastic, and we're looking for something similar in the second half again, something about 1 to 1.5% growth.

So again, that cooler growth narrative, the softer jobs story, and easing concerns about inflation all just come together for me and point to the Fed just gradually cutting rates a little bit lower, closer and closer towards neutral.

And James, last but not least, before I let you go, we have less than 60 seconds here, but when we take a look at what's happening across all the asset classes, we are looking at gold hit a new record highs.

And of course yesterday we came back from the holiday weekend and we saw that bond sell off.

So what do you make of what we're seeing in the other asset classes?

Yeah, no, I think there are still concerns about valuations on many fronts.

And of course also as you say, the big story right now is what's happening in the bond market.

You've got a concern that perhaps the Fed may not be as focused on its inflation target with these new members perhaps being talked about, you know, will they cut too far?

Will they cut too aggressively?

That's unsettling the bond market in terms of longer term inflation and of course ongoing fiscal concerns as well, so.

This worry that we could see longer dated borrowing costs continue to push higher and higher just sort of undermines a lot of asset valuations.

It boosts some, but certainly for risk assets such as equities, it does create an area of vulnerability.

Well James, great having you back on the show.

Thank you as always for all of your insights and your perspective.

Thanks so much.

Thank you.