Cooling US Job Market, Will the Tightening Trend Break... Impact on Korean Interest Rates

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed)
[Photo by Yonhap News]

As the overheated U.S. labor market gradually cools down, expectations are growing that the U.S. Federal Reserve (Fed) will hold its benchmark interest rate steady. If the U.S. tightening stance eases, the Bank of Korea's timing for rate cuts could also be brought forward. However, since the U.S. unemployment rate is still considered low, uncertainty surrounding U.S. monetary policy is expected to continue for the time being.

The U.S. Department of Labor announced on the 1st (local time) that nonfarm payrolls increased by 187,000 in August. This exceeded the expert forecast of 170,000 compiled by The Wall Street Journal (WSJ), but was significantly lower than the average monthly increase of 271,000 over the past 12 months. In particular, the August unemployment rate rose by 0.3 percentage points from the previous month to 3.8%, marking the highest level in one and a half years since February last year (3.8%).

The average hourly wage growth rate was also 0.2%, lower than the previous month (0.4%) and the expected rate (0.3%). The U.S. Department of Labor also significantly revised downward the employment figures for June and July. The June employment increase was reduced by 80,000 from the initially reported 185,000 to 105,000, and the July increase was cut by 30,000 from 187,000 to 157,000.

These indicators show that the U.S. labor market is cooling faster than expected. Despite concerns about a recession, the U.S. had seen an overheated labor market that did not cool down, which had raised expectations for further Fed tightening. However, if the once red-hot U.S. labor market continues to cool, the outlook for economic overheating will weaken, and the Fed's tightening stance may also ease.

The market is already placing a high probability on the Fed holding rates steady. According to the Chicago Mercantile Exchange (CME) FedWatch on the same day, participants in the interest rate futures market see a 94% chance that the Fed will keep rates unchanged at the September Federal Open Market Committee (FOMC) meeting. This is a significant increase from 80% a week ago. The probability of a rate hold at the November FOMC is also the highest at 64.6%, while the chance of a 0.25 percentage point hike has dropped to 33.5%.

On the 14th, an employee is organizing dollars at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

The Fed's monetary policy stance greatly influences the Bank of Korea's benchmark rate decisions as well. At a press conference following the Monetary Policy Committee meeting on the 24th of last month, Lee Chang-yong, Governor of the Bank of Korea, said, "It is more important whether the U.S. continues its tightening stance than the gap between the Korea and U.S. benchmark rates themselves," adding, "If the Fed announces a final rate much higher than market expectations, the market could experience significant volatility."

Mohamed El-Erian, advisor to Allianz Group, explained in a post on X (formerly Twitter) that "Taken at face value, this employment report increases the likelihood that the Fed, which heavily relies on economic indicators, will not raise rates further in this tightening cycle."

However, there are also opinions that the U.S. tightening stance will continue for a considerable period. According to the International Finance Center on the same day, U.S. bank Wells Fargo stated that employment remains stable and wage growth continues, making further rate hikes unlikely but indicating that a long time will be needed before any rate cuts. Investment bank Barclays also analyzed that the U.S. wage growth rate has not rapidly decelerated.

This content was produced with the assistance of AI translation services.