Reduced hiring and slower growth in US may lead to interest rate cuts: Fed survey

US economic slowdown: Economic activity in the United States has decelerated from mid-July through late August, with businesses reducing their hiring efforts, according to the Federal Reserve's latest "Beige Book" survey. This slowdown highlights why the Federal Reserve is anticipated to lower interest rates later this month.

The survey, which gathers insights from business contacts across the Fed’s 12 districts, indicates a general easing of input costs, though inflation pressures have risen modestly. 

"Economic activity showed slight growth in only three districts, while the number of districts reporting flat or declining activity increased from five to nine," the Fed reported. Employers have become more selective in hiring and less inclined to expand their workforces due to concerns over demand and an uncertain economic outlook.

Powell hints rate cut

Fed Chair Jerome Powell has signalled the central bank's intention to reduce its benchmark interest rate from the current 5.25%-5.50% range, which has been stable for over a year, at the upcoming policy meeting on September 17-18. The key question is whether the Fed will opt for a quarter-percentage-point cut or a more substantial half-percentage-point reduction due to deteriorating labour market conditions.

Consumer spending has also decreased in most Fed districts. For instance, the Richmond Fed reported a slight softening in consumer spending, with a hardware retailer noting a drop in average sales, a restaurant chain offering promotions to boost sales, and vehicle sales declining due to higher financing costs.

The Fed aims to achieve a "soft landing" for the economy, where growth slows gradually while maintaining a low unemployment rate and bringing inflation back to its 2% target. After experiencing unexpectedly high inflation earlier this year, the pace of annual price increases has moderated to 2.5% in July, and officials are increasingly confident they will meet their inflation target.

Borrowing costs impact jobs

Despite this, attention has shifted to the rising unemployment rate, which reached a nearly three-year high of 4.3% in July, marking the fourth consecutive monthly increase. There are growing concerns that elevated borrowing costs might be excessively dampening labour demand.

The slowdown in the job market has been characterised more by reduced hiring rather than layoffs. The Fed’s survey supports this, noting that reports of layoffs remain low. Job openings fell to a 3.5-year low in July, according to earlier data.

While five Fed districts reported slight or modest increases in employment growth, some districts observed reductions in shifts and hours, unfilled positions, or headcount reductions through attrition. The Atlanta Fed noted that several contacts were slowing their hiring pace, and other districts mentioned reduced worker hours.

Consumer spending selective

On the inflation front, there was more positive development. Firms generally expect price and cost pressures to stabilise or ease further. Several districts reported that consumers are becoming more selective in their purchases. 

For example, the San Francisco Fed highlighted that many online shoppers are seeking discounted or promotional products, while the Boston Fed reported that a clothing retailer plans to cut prices on popular items to attract customers deterred by previous price increases.

Investors are currently anticipating rate cuts from the Fed this month and in the following months of November and December.

(With Reuters Inputs)