Will the Fed double down on September's failure?
September's jobs report was a shock to the system and upended expectations about the Fed's next move.
With 254,000 jobs added in September, well above the 140,000 expected, and the unemployment rate falling to 4.1 percent, one thing becomes clear. The labor market has not weakened significantly. There is strength in the front.
Wage growth was 4%, faster than expected, further complicating the Fed's argument that it needs to support the economy with low interest rates. After the Fed unexpectedly cut interest rates by 50 basis points in September, the burning question now is: Whether central banks have gone too far.
Aditya Bhave of Bank of America He succinctly captured the change in mood in a note to clients on Tuesday, saying, “The much-hyped September jobs report and large upward revisions to GDP and GDI justify the Fed's super-sized 50bp rate cut in September.'' This suggests that it was not regulated.”
In other words, the Fed may have panicked prematurely and made the wrong decision. Temporary fluctuations in data leading to a full-scale recession.
Babe went further, noting that conversations with clients are rapidly shifting from whether the Fed will cut rates by 25 or 50 basis points in November to whether they should cut rates at all. “Will the Fed Skip November? Is this to compensate for the 50bp rate cut in September? ” Barbe asks.
“September employment statistics were much better than expected.” We should give the Fed pause. We look forward to another rate cut at the November 7th meeting,” Joe LaBonna of SMBC Nikko Securities said in a recent note.
Billionaire investor Ray Dalio expresses doubts about Fed policy decisions “Significant reduction in interest rates” Following a strong report in September. Dalio: “The current economy is in a relatively good balance.'' said At the Greenwich Economic Forum. He noted that September's interest rate cut gave policymakers room to move more slowly.
Market believes the Fed will cut rates further in November
The market still believes the Fed will cut interest rates, but Potential for another 50 basis points reduction thrown into the ash heap of history. At the end of September, the market was pricing in an even chance of a half-point cut and a quarter-point cut. As of Tuesday, there is no chance of a significant rate cut. The probability that there will be no rate cut at all has risen to about 13%.
The market seems confident the Fed will consider next September employment statistics show only temporary decline—Or it could be an error in the data. As long as inflation appears normal, the Fed will stick to its tough stance.
“Even if the Fed concludes with hindsight that it didn’t need to cut rates by 50 basis points in September, I don’t think strong labor data alone will dissuade it from cutting rates (by 25 basis points) in November,” Babe said. he points out.
There are also reliability issues. The Fed put itself in a bind by acting so boldly and early. If the Bank backs off on interest rate cuts now, concerns about the future of interest rates may increase.
Finally, the Fed's decision to cut rates before the election could put pressure on the Fed to cut rates after the election, especially if Donald Trump wins. Indeed, it would look politically awkward if the Fed were to change the direction of its interest rate policy simply because: Control of the White House changed political parties..
From soft landing to no landing
There's no denying that the Fed is trying to thread the needle. A soft landing where inflation subsides without causing economic pain.. However, the September employment report casts doubt on this delicate balance. If wage growth continues to accelerate as it did last month, inflationary pressures could reignite before the Fed reacts. In other words, it is increasingly likely that we will find ourselves in a scenario with no end in sight, where inflation either remains high or begins to rise again.
But the real question is whether the Fed should cut rates given the economy's resilience. another cut Risk of overstimulation A labor market that clearly doesn't need much support.
