Surprisingly strong hiring in September has taken pressure off the Federal Reserve by reducing worries over the US labor market, giving policymakers room to continue cutting interest rates at a more gradual pace in coming months.
Released early Friday, the “dinger” of a jobs report, as JPMorgan Chase & Co. chief US economist Michael Feroli called it, almost immediately reduced expectations among economists and investors that policymakers would consider another big move in November on the back of their half-point cut last month.
“Today’s report should also make the Fed’s job easier,” Feroli, who previously called for another outsized cut, wrote in a note to clients. “We now anticipate a path of 25-basis-point cuts.”
Bank of America economist Aditya Bhave also changed his November call from a half-point to a quarter-point cut, while Yelena Shulyatyeva, senior US economist at BNP Paribas, said she also anticipated a “measured pace” of rate cuts.
“The sizable acceleration in September payrolls and the lower unemployment rate, coupled with broader strength in US economic data over the last couple of weeks,” she wrote in a note to clients, “add to signs of resilience and strengthen the case for a soft landing.”
Bureau of Labor Statistics data showed employers added 254,000 positions in September, topping all estimates, and hiring in both July and August was revised up. The unemployment rate declined to 4.1%, while 12-month wage gains easily outpaced inflation.
All that came alongside news that dockworkers had agreed to end a three-day strike that had paralyzed trade on the US East and Gulf coasts.
The combined news reset, for now, the debate surrounding the Fed’s next move. Bets on fed funds futures are calling for a 25-basis-point cut in November, down almost 10 basis points from before the report.
Speaking last week, Fed Chair Jerome Powell said projections issued by officials alongside their September rate decision point toward quarter-point rate cuts at the next two meetings, in November and December.
Nonetheless, commentators quickly emerged Friday with a range of competing warnings. Some urged the Fed not to overreact to one report and back away from more cuts, while others argued the new data showed the Fed had cut too quickly.
“With the benefit of hindsight, the 50-basis-point cut in September was a mistake, though not one of great consequence,” Former Treasury Secretary Lawrence Summers, a frequent critic of the Fed in recent years and a paid contributor to Bloomberg TV, said in a post on X.
Drew Matus, chief market strategist at MetLife Investment Management, said the report suggests the decision in November “is between zero and 25, not 25 and 50.”
“They just need to slow down the pace because the last thing they can afford is a reacceleration of inflation,” Matus said.
Still Room for 50
At the same time, some analysts still saw room for another half-point cut, emphasizing that officials will get plenty of additional data by the time they convene Nov. 6-7. Before that, policymakers will see two inflation reports for September and the October employment report.
“The market moved very solidly to 25 basis points, and I think maybe that’s an overreaction,” Derek Tang, an economist at LH Meyer/Monetary Policy Analytics, said. “Our base case has been 25, and I think that’s an even stronger presumption now, but I don’t think we should rule out a committee that’s willing to respond to any kind of weakness on the real side from another jobs report, as long as inflation is still coming down.”
That view could be supported by a deeper dive into the labor market data, which pointed to some pockets of weakness. There were more discouraged workers in the economy last month, and the number of people unemployed for more than six months rose to the highest in almost three years. Moreover, more than half of the payroll advance was concentrated in only two sectors: leisure and hospitality, and health care.
The only policymaker to react publicly to the jobs report on Friday, Chicago Fed President Austan Goolsbee, showed little willingness to back away from additional cuts. One of the most dovish members of the Federal Open Market Committee, he welcomed the news, but also warned in an interview with Bloomberg TV that he worried inflation might end up undershooting the Fed’s 2% target.
“This jobs number today, and the whole report, is a superb report,” Goolsbee said, adding, “If you look at expectations, there are some signs that inflation might undershoot the 2% target, and we want to be mindful of that too.”
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