By Ann Saphir
A surge in US job growth has financial markets betting the Federal Reserve will follow last month’s half-point interest rate reduction with smaller moves, and ignited a debate over whether the policy rate ends up at a higher level than previously expected.
A Labor Department report on Friday showed employers added 254,000 jobs in September, far more than expected, and the unemployment rate declined to 4.1 percent.
Within minutes, traders of futures that settle to the Fed’s policy rate had all but abandoned bets on another upsized interest rate reduction before the end of this year, and moved to price in quarter-point reductions instead.
They are also pricing in an end point to the rate-cutting at somewhere between 3.25 percent and 3.75 percent by the middle of next year, above the 3.00 percent to 3.25 percent end-point range that traders had previously seen likely. The current range is 4.75 percent to 5.00 percent.
Chicago Fed President Austan Goolsbee, in back-to-back appearances on Bloomberg TV and Yahoo! Finance shortly after the jobs report, called it “superb” and said that more such strong labor market data would give him added confidence that the US is at the Fed’s goal of full employment and not headed for a crash.
Even so, he said, Fed policymakers will likely need to cut rates by “a lot” over the next 12 to 18 months to make sure the labor market stays strong and inflation continues to come in around the Fed’s 2 percent target, as it has in recent months.
Most Fed policymakers currently see the policy rate settling out somewhere between 2.5 percent and 3.5 percent , he said, referring to projections published last month which show a median expectation of 2.9 percent but a range of forecasts around that.
“You have both time and runway to figure out where the settling point is,” Goolsbee said.
If jobs numbers continue to improve along with GDP, he said, that could mean a continuation of what has been recent rapid growth in productivity.
That in turn would point to a higher end point for the Fed policy rate, and would be a “glorious” outcome because it would signal a stronger economy overall, Goolsbee said.
Analysts largely took the jobs report much as Goolsbee did: reason for optimism about economic growth, but without changing the need for further, albeit gradual, rate cuts ahead.
Friday’s jobs report “is a potential game changer for the Fed and market expectations on the size and pace of future rate cuts,” BMO economists wrote. “It also is a big upside risk to our consumer spending and GDP growth forecasts in the near-term.”
Expectations could still change before the Fed’s Nov. 6-7 policy meeting, which will come after fresh data on inflation and another monthly jobs report.
The Fed’s policy-setting Federal Open Market Committee has said it wants to recalibrate the policy rate as inflation drops closer to its 2 percent goal and the labor market cools.
Recent data showing job market cooling “had threatened to turn into something more worrisome, but after today’s report the soft landing looks back on track,” JP Morgan economist Michael Feroli wrote. “We think it would take a rather large October (or early November) surprise to move the Committee off this path of gradual rate normalization.”
Nonfarm payrolls increased by 254,000 jobs last month, the most since March, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls would rise by 140,000 positions after advancing by a previously reported 142,000 in August.
Estimates for September’s job gain ranged from 70,000 to 220,000. The three-month average of monthly job growth increased to 186,000 from 140,000 in August.
The share of industries reporting an increase in payrolls jumped to 57.6 percent from 51.8 percent in August.
The flow of strong data, including consumer spending, since the US central bank kicked off its policy easing cycle with an unusually large 50 basis points rate reduction last month, had some economists wondering if policymakers had panicked.
“If the Fed had known the revisions to the July and August prints in advance, it is very likely that they would have gone for a 25 basis points move instead,” said Kyle Chapman, FX markets analyst at Ballinger Group.
The dollar rallied to a seven-week high against a basket of currencies. Stocks on Wall Street were mostly higher. US Treasury yields rose.
Financial markets boosted the odds of a quarter-percentage-point rate reduction in November to 95 percent from 71.5 percent before the report, CME Group’s FedWatch tool showed. The odds of a 50-basis-point cut were almost wiped out.
The Fed cut its policy rate by 50 basis points last month to the 4.75 percent -5.00 percent range, its first rate reduction since 2020. It hiked rates by 525 basis points in 2022 and 2023.
But the labor market could experience some brief turbulence after Hurricane Helene devastated large swathes of the US Southeast last week. Tens of thousands of machinists at Boeing also went on strike in September, with ripple effects on the aerospace company’s suppliers. -Reuters
