According to Bank of America’s forecast, the August jobs report will play a crucial role in shaping the U.S. Federal Reserve’s approach to cutting interest rates. The Fed is expected to see an increase of 200,000 jobs in non-farm sectors, exceeding current market expectations, along with a decline in the unemployment rate to 4.2%. Bank of America considers this data pivotal in determining the Fed’s monetary policy path.
In a note released on Tuesday, Bank of America outlined three potential scenarios based on the jobs report results, each involving a different approach by the Federal Reserve:
Scenario 1: If the jobs report is strong, with a significant increase in employment, this could ease concerns about an economic recession. In this case, the Fed may follow a “cautious cuts” strategy, implementing a 25-basis-point cut every quarter starting in September. This scenario could surprise markets, which currently expect cuts of around 100 basis points, meaning that current market estimates may be more optimistic than the Fed’s actual stance.
Scenario 2: If the report shows moderate job growth, between 100,000 and 150,000, with the unemployment rate remaining at 4.3%, this may not signal an imminent recession but would suggest that wage and employment increases are not just temporary shifts. In this context, Bank of America expects the Fed to continue with 25-basis-point cuts at each meeting for the rest of the year, with the possibility of an additional cut exceeding 100 basis points next year. However, the bank believes that a 50-basis-point cut in September might not be on the table in this case.
Scenario 3: If the data shows clear weakness, such as job growth below 50,000 or a significant rise in unemployment, this could heighten recession fears. In this scenario, the Fed may take more aggressive action, such as cutting interest rates by 50 basis points in September, November, and December.
Ultimately, Bank of America emphasizes the importance of the nuanced details in the jobs report, noting that the Fed will consider all aspects of the data when making its future monetary policy decisions.
