Fed"s restrictive policy amid easing inflation trends

In August, the U.S. economy added 142,000 jobs, but revisions for June and July brought the three-month average down to 116,000 jobs, a significant decline from the previous average of 211,000. The construction sector showed a rebound in employment, which is crucial given the ongoing housing shortages. Despite a plateau in hiring and separation rates, the labor force is expanding, partly due to increased immigration, although the influx of younger workers is necessary for sustained employment growth. Labor productivity saw a year-over-year increase of 2.7% in the second quarter, a slight decrease from 2.9% in the first quarter. The Federal Reserve Bank of Atlanta's GDPNow model had projected a healthy real GDP growth of 2.1% for the third quarter. However, as economic growth slows, even minor adverse events could lead to a downturn, raising concerns about the Federal Reserve's ability to act effectively. Traders are anticipating a reduction in the fed funds rate by 100 basis points before the year's end, with a total cut of 250 basis points expected over the next year. While it may be tempting to front-load these cuts, a larger-than-expected reduction could signal to investors that the Fed has troubling insights about future economic conditions, potentially dampening investment and consumption. The core Personal Consumption Expenditures (PCE) price index showed a 2.6% increase in July compared to the previous year, with a 6-month annualized rate of 2.5% and a 3-month rate of 1.7%, slightly below the Fed's target. The consensus forecast suggests a modest monthly increase in inflation, indicating that while a soft landing is likely, the risks of economic mismanagement have increased.