Strong payroll growth last month has set the Federal Reserve on a good course for a soft landing, although inflation concerns are yet to subside and weigh heavily on consumer spending.
With a resilient labor market, slower price increases, and declining interest rates, the current state of the macro economy is not bad; that is important in this crucial policy and political juncture.
We’ve been expecting a soft landing, and this report strengthens our confidence that the scenario remains viable,” said Beth Ann Bovino, chief economist at U.S. Bank, in the wake of Friday’s nonfarm payrolls data. “It also increases the possibility of a no landing scenario, implying that 2025 economic performance could be even stronger than we currently forecast.
The job growth figures came in above expectations, with businesses and government agencies adding 254,000 jobs considerably higher than the Dow Jones forecast for 150,000. This is a significant rise from the revised figures of August and bucked a trend of falling job growth and growing fears of a wider economic slowdown which has been observed since April.
By the same token, the report greatly reduced expectations of the Federal Reserve repeating its half percentage point interest rate cut from September anytime soon.
After the report’s release, the futures markets shifted to fully price in a quarter point rise at the Fed’s next meeting in November and another in December, according to the CME Group’s Fed Watch tool. The previous expectation was for a half point rise in December, followed by quarter point cuts at all eight FOMC meetings next year.
The Fed’s decision has raised a number of questions. Economists with Bank of America asked in a note to clients, “Did the Fed panic? ” referring to the dramatic September cut. Others have raised concerns over the wild swings and misjudgments among Wall Street analysts themselves.
David Royal, Thrivent’s chief financial and investment officer, explained, “It does appear unlikely that the Fed would have performed such a dramatic cut if it had known how strong this past report would be.
Kathy Jones, chief fixed income strategist at Charles Schwab said, “The question becomes, how does everybody keep getting it wrong?” She highlighted that the Fed has a really tough job in terms of what the right policy response should be. The Federal Open Market Committee meets on November 6-7, shortly after the U.S. presidential election, at which time it will have a lot more additional data to consider.
Some analysts have said that the Fed may need to upwardly revise its estimate of the “neutral” interest rate one that neither stimulates nor constrains economic growth a sign that benchmark interest rates may stabilize at a higher level than in recent years.
What does this news mean for the Fed? One thing is certain: a 50 basis point hike is off the table for this meeting. “There is no need for that,” Jones said. “Do they sit it out? Do they do another 25 because they are still so far away from neutral? Or do they take this in concert with other potentially softer numbers? Boy, are they going to have a lot to discuss.”
Meanwhile, the stability of the economy, the labor market being in better shape than had been feared, and a belief that policymakers can think about their next move in due course will all be taken as comfort by those making policy. “We’ve seen a pretty resilient economy lately, although there are some skeptics and some muted consumer confidence,” said Elizabeth Renter, senior economist at NerdWallet. “In an election year, emotions are high, and every economic report or event an “Aha.” moment can send emotions running wild. Overall, though, the big-picture economic indicators suggest that the U.S. economy has been, and still is, strong.
