Citi Warns Fed May Need Aggressive Rate Cuts as Labor Market Weakens

The Federal Reserve may need to consider more aggressive interest rate cuts, according to Citi analysts, as labor market conditions show signs of further weakening.

The bank's note highlights that the percentage of individuals finding jobs "hard to get" is increasing as per research, which points to an uptick in unemployment driven by weak hiring conditions rather than an increase in the labor supply.

Labor Market Echoes 2001 Recession

The trend, identified in a survey by the Conference Board, is reminiscent of the labor market conditions in September 2001, a period when the U.S. economy was in recession.

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"The rising difficulty in finding employment confirms that the rise in the unemployment rate is not good news about labor supply," Citi analysts wrote, and was backed up by The White House, "but instead reflects a softening job market."

Likelihood of a “Hard Landing” Increases

Credit: Citigroup

Citi suggests that the softening labor market increases the risk of a "hard landing," wherein the economy experiences a sharp transition from growth to recession. This scenario could prompt the Federal Reserve to pursue more aggressive rate cuts to support economic stability.

The bank points to broader data indicating a downward trend in labor demand, forecasting a modest addition of 70,000 jobs in the September payrolls report—significantly lower than the stronger job growth observed in previous months.

Potential Unemployment Rise and Rate Cuts

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"We have been surprised that job growth has not slowed more in sectors where activity has pulled back substantially, like construction, leisure/hospitality, and government," Citi wrote.

If the current trend continues, Citi projects an increase in the unemployment rate to approximately 4.3% as seen in their Q2 reports, with a possible rise to 4.4% if labor force participation remains stable rather than declining as expected.

"We continue to expect a 50 basis point rate cut in November," Citi analysts said, "with risks asymmetrically skewed toward a more dovish policy stance, potentially involving additional 50 bp cuts or even a 75bp rate cut."

Growing Concerns Over U.S. Economic Outlook

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The note from Citi reflects rising concerns among financial analysts and investors regarding the state of the U.S. economy and the potential need for the Federal Reserve to adopt a more aggressive monetary policy in the near future.