New numbers stop all talk of a 50bps cut
The US September jobs report has all but eliminated the possibility of another half-percentage-point rate cut at the Federal Reserve’s upcoming November meeting, reinforcing expectations of a more modest quarter-point reduction.
Last month, the Fed cut rates by a larger-than-usual half-point, responding to signs of cooling inflation and labour market weakness. However, Friday’s robust jobs data indicates that the labour market has been stronger than previously reported, making it less likely that officials will pursue an aggressive rate cut.
The US economy added 254,000 jobs in September, significantly surpassing economists' forecasts and reflecting stronger growth than anticipated in the summer months. This report, combined with upward revisions to hiring figures for July and August, suggests that labour market conditions are not deteriorating as much as previously thought.
On Monday, Federal Reserve Chair Jerome Powell had already signalled that officials were not rushing to implement more aggressive rate cuts, and September’s strong job gains further support this cautious approach. Powell’s comments were echoed by many economists after Friday’s data release, with most agreeing that the larger half-point cut seen in September was a necessary “recalibration,” but further drastic action is not warranted.
“These numbers are a bit of a game-changer,” Josh Hirt, senior US economist at Vanguard told the Financial Times. “When you look at the revisions too, this changes the narrative about the underlying pace of job growth . . . overall it’s very positive.”
The Fed’s recent rate cuts have been described as a strategy to adjust monetary policy in a way that is less restrictive for the economy, ensuring continued growth without overheating. The solid labour market data means the central bank is likely to stick to a quarter-point cut in November, consistent with its “recalibration” approach, rather than reverting to a more aggressive strategy.
Investors have also adjusted their expectations following the jobs report. Before the data release, there was speculation that the Fed might consider another half-point reduction in rates at the November meeting. However, after seeing the stronger-than-expected job growth, futures markets now predict a 94% chance of a smaller quarter-point cut, compared to 65% prior to the release.
“The market likes cuts but it doesn’t like them if they’re because of real weakness in the economy and worries about recession,” Hirt explained. “It likes cuts with a positive underlying economy, which would bolster the soft landing scenario.”
September’s job gains were driven by sectors like leisure and hospitality, which saw an increase of almost 70,000 jobs, particularly in restaurants and bars. The healthcare sector also saw a rise of 45,000 jobs. Other sectors, including manufacturing, retail, and transportation, showed little to no job growth for the month.
Wage growth continued as well, with average hourly earnings increasing 0.4% in September and up 4% compared to last year, further supporting the notion that the labour market remains healthy.
With the Fed focused on maintaining economic stability and ensuring inflation returns to its 2% target, officials have become more confident in their ability to balance interest rate reductions without causing a recession. The strength of the labour market has allowed the central bank to take a more measured approach in its rate-cutting strategy.
The unemployment rate, which fell to 4.1% in September from a three-year high of 4.3% in July, continues to reflect the overall stability of the job market. While some economists caution that slower demand could eventually lead to job losses, there has been no significant rise in layoffs to date.
New data also revealed that job vacancies unexpectedly increased to 8 million in August, signalling that demand for workers remains robust. However, the rate of job quitting fell to its lowest level since June 2020, suggesting that workers may be more cautious in the current economic climate.
With the solid hiring figures and steady wage growth, Fed officials are likely to stay on track for a more measured rate cut next month, aligning with their broader strategy of a gradual recalibration rather than aggressive action. A quarter-point reduction in November seems the most likely course as the central bank aims to support growth while keeping inflation under control.
