Fed rate-cut size debate follows mild softening in jobs data

Total additions to employment were relatively weak for the second consecutive month in the latest Bureau of Labor Statistics report, while the latest estimates for nondepository hiring in housing finance were slightly stronger than those in previous months.

The United States added 142,000 jobs in August, below the 161,000 estimate but outpacing the number of additions the previous month. Mortgage banker and broker numbers reported with a one-month lag totaled 272,400 in July, up from a downwardly revised 269,500 in June, reflecting  cautious staff additions to handle incremental growth in demand for loans. Total unemployment fell as forecast to 4.2% from 4.3%.

Altogether, the mild weakness in overall job numbers reported Friday confirmed growing expectations that federal policymakers will loosen monetary policy and convinced some that the cut they're likely to make won't be deep.

"Federal Reserve officials have recently pivoted from a primary focus on inflation to a more balanced view, with concerns both about inflation and employment. This report highlights that such a pivot makes sense, and that a 25-basis-point cut at its September meeting is a sensible first step at this time," Michael Fratantoni, chief economist at the Mortgage Bankers Association, said in a report published Friday morning.

However, other reports indicated a certain amount of disagreement over the size of a potential cut is continuing

"All of this does little to clear up the debate over the September Fed Meeting," said Michael Brown, senior research strategist at online brokerage Pepperstone, in a report Friday morning. "Doves will point to a cooling pace of headline payrolls growth as potential reasoning for a large 50 basis point cut. Hawk, meanwhile, will reasonably point toward the lack of further cooling compared to the July report."

Treasury bond yields that can be indicative of mortgage rate direction had initially fallen after the release of Friday's job numbers, according to a report from Mortgage Capital Trading.

"The U.S. 10 Year Treasury yield is currently 3.697%, down from the open at 3.734%. This is somewhat new territory for the 10-year yield having not seen these levels since roughly June of 2023," said Cody Echols, senior capital markets technology advisor at MCT, in a report circulated shortly after 9 a.m. on the East Coast.

Almost 43% of the consensus was expecting a rate cut of 50 basis points or more at the time of the MCT report's writing, according to Echols.

A later report suggested there was little change in the bond market and the outlook for mortgage rates after the release of the latest jobs numbers.

"Ten-year Treasury yields are essentially flat, implying market sentiment is unchanged and the Fed cuts are priced into mortgage rates," First American Senior Economist Sam Williamson said in a commentary circulated just before 10 a.m.

Speculation about the size of a potential Fed cut had heated up earlier in the week, when many of the other key jobs indicators also registered some weakness.

Just the day before, ADP had reported private employers had only added 99,000 jobs in August, lower than a downwardly revised 111,000 in July and an earlier consensus estimate of 145,000. Private job additions were last this low in early 2021.

"The job market's downward drift brought us to slower-than-normal hiring after two years of outsized growth," ADP's chief economist Nela Richardson said in the payroll provider's national employment report. 

Also on Wednesday, the BLS Job Openings and Labor Turnover survey similarly produced a weak number for August and produced a downwardly revised July figure. The same day, the Beige Book survey reported nine of 12 Fed districts reported stable or lower activity.

"The Fed now has all the evidence it needs to commence cutting key interest rates until economic activity perks up," said Louis Navellier in a report on the market published Thursday. Navellier & Associates is a money manager that specializes in serving long-term investors.

Navellier said policymakers are likely to stick to a 0.25% reduction because of the negative economic signals a steeper one could send to the market.

Another development that might give members of the Federal Open Market Committee pause when it comes to considering a larger rate cut is the fact that jobless claims reported Thursday were a little weaker than expected, suggesting unemployment is remaining fairly low.

"Initial jobless claims contradicted the weakness in the ADP coming in close to forecast at 227,000 claims," Echols noted in a report published Thursday. This was below a 230,000 estimate, according to the report.

Continuing claims also were slightly lower than the 1.87 million expected, coming in at just below 1.84 million.