A recruitment sign is posted outside Urban Outfitters at Tysons Corner Center Mall on August 22, 2024 in Tysons, Virginia.
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The sharp increase in non-farm payrolls in September lifted the U.S. economy out of the shadow of recession and provided a fairly open path for a soft landing by the Federal Reserve.
If this sounds like a Goldilocks scenario, it might not be far off, although lingering inflation concerns are straining consumers’ wallets.
A gravity-defying job market, at least a slowdown in price increases and falling interest rates, put the macro picture in a pretty good place right now – a critical moment from a policy and political perspective.
“We’ve been expecting a soft landing,” Bank of America chief economist Beth Ann Bovino said after Friday’s nonfarm payrolls report. “This gives us more confidence that it appears to be here to stay. “It also increases the likelihood of a non-stop scenario, which would mean stronger economic data in 2025 than we currently expect.”
The number of jobs is certainly better than almost anyone imagined, with companies and governments joining forces Employment increased by 254,000beating the Dow Jones by 150,000 points. Even compared with August’s upwardly revised numbers, that’s a big improvement and reverses a trend that began in April with a decline in payrolls and growing concerns about a broader economic slowdown or worse.
Beyond that, it virtually eliminates any chance of the Fed repeating its policies Cut interest rates by half a percentage point Starting soon in September.
In fact, the futures market reversed position following the report, pricing in an almost certain chance of moving just 25 percentage points at the November Fed meeting, followed by another 25 percentage points in December, according to CME Group. percentage point. Fed Watch Measurement. Markets had been looking for a half-point rate cut in December, followed by a quarter-point rate cut at each of eight FOMC meetings in 2025.
Not a perfect picture
That won’t be the case anymore, though, as barring more disappointment in the labor market, the Fed can take a dovish pace in the easing cycle.
“If we continue to see a stronger-than-expected economy, that could give the Fed reason to slow the pace of rate cuts through 2025, with an exit rate slightly higher than currently expected, while the economy remains strong,” Bovino said. “This is good news for the Fed and the economy.”
To be fair, the employment situation still has some shortcomings.
More than 60% of September’s growth came from the familiar sectors – food and beverage establishments, health care and government – all beneficiaries of fiscal largesse that has pushed the 2024 budget deficit to the brink of $2 trillion.
The report also suffers from some technical factors, such as a low response rate from survey participants, which could cast a pall over Friday’s sunny report and lead to downward revision in the following months.
But overall, the news is very good and raises questions about how drastic the Fed will need to do.
Questions for the Fed
For example, Bank of America economists asked, “Is the Fed panicking?” in a client note citing a half-percentage point, or 50 basis point, rate cut in September, while others dismissed Wall Street pundits’ wild swings and misjudgments. expressed doubt. David Royal, chief financial and investment officer at financial services firm Thrivent, speculated that “it’s doubtful the Fed would have cut rates that much if it had known the report was so strong.”
“The question is, why does everyone make this mistake?” said Casey Jones, chief fixed income strategist at Charles Schwab. “Why can’t we use all the information we have to get the right number?”
Jones said the Fed will face a dilemma in formulating an appropriate policy response. The next meeting of the Federal Open Market Committee (FOMC) will be held on November 6-7, and there will be more to digest in the five-week meeting after the US presidential election.
Some comments after the meeting suggested the Fed may have to raise its estimate of a “neutral” interest rate that neither promotes nor constrains economic growth, suggesting the benchmark rate will be higher than it has been in recent times.
“What’s the Fed’s reaction to this? Of course, they’re not going to consider a 50 basis point hike at the next meeting. I don’t see any reason to do that,” Jones said. “Are they going to pause? Are they going to do another 25 basis points because they’re nowhere near neutral? Are they just weighing that against other numbers that may not be as strong? I think they have a lot to do. .
In the meantime, though, officials may be satisfied that the economy is stable, the labor market is not in trouble as much as was suspected, and they have time to weigh their next steps.
“Despite some naysayers and low consumer sentiment, we’ve seen pretty good economic progress over the past few years,” said Elizabeth Renter, senior economist at NerdWallet. “In an election year, enthusiasm is running high , every economic report or event will cause a strong reaction, but the economic aggregate tells us that the U.S. economy has always been strong.”
