The Fed is on the verge of pulling off the elusive financial mushy touchdown in 2024 after September's nice jobs report
A hiring sign is posted on the exterior of Urban Outfitters at the Tysons Corner Center shopping center in Tysons, Virginia, on August 22, 2024.
Anna Rose Layden | Getty Images
September's huge wage increase lifts the U.S. economy out of the shadow of recession and gives the Federal Reserve a fairly open glide path to a soft landing.
While that sounds like a Goldilocks scenario, it's probably not far off, even with ongoing inflation concerns weighing on consumers' wallets.
A gravity-defying labor market, at least a slowdown in price increases and falling interest rates mean that the macroeconomic situation is currently quite good – a critical time from a political and policy perspective.
“We expected a soft landing. This just gives us more confidence that it will continue,” said Beth Ann Bovino, chief economist at U.S. Bank, after the release of the nonfarm payrolls report on Friday. “It also increases the likelihood of a non-landing, meaning the economic data for 2025 will be even stronger than we currently expect.”
The number of jobs was definitely better than virtually anyone would have expected. Companies and the government jointly increased the number of employees by 254,000, shattering the Dow Jones consensus of 150,000. That was a big step forward even from August's upwardly revised numbers, reversing a trend that began in April of declining employment numbers and growing concerns about a broader slowdown – or worse.
Furthermore, any chance that the Federal Reserve would repeat its half-percentage-point interest rate cut from September in the foreseeable future was virtually eliminated.
In fact, futures markets reversed their positioning following the report, pricing in a near-certain probability of a move of just a quarter point at the Fed's November meeting, followed by another quarter point in December, according to CME Group's FedWatch indicator. Markets had previously hoped for a half-point cut in December, followed by a corresponding quarter-point cut at each of the Federal Reserve's eight Federal Open Market Committee meetings in 2025.
Not a perfect picture
However, this is no longer the case as the Fed can set a moderate pace in its easing cycle provided there are no further disappointments in the labor market.
“If we continue to see a stronger-than-expected economy, that could give the Fed reasons to slow the pace of rate cuts through 2025, with the exit rate slightly higher than it currently expects, all while maintaining the strength of the economy. said Bovino. “That would be good news for both the Fed and the economy.”
To be sure, there are still some blemishes in the labor market picture.
More than 60% of September's growth came from the usual suspects – food and beverage companies, health care and government – all of which were beneficiaries of the fiscal largesse that pushed the budget deficit to $2 trillion in 2024.
There were also some technical factors in the report, such as a low survey respondent response rate, which put a bit of a damper on Friday's sunny report and could lead to downward revisions in subsequent months.
But overall the news was very good and raised questions about how aggressive the Fed needs to be.
Questions for the Fed
Bank of America economists, for example, asked, “Is the Fed panicking?” in a note to clients about the half-percentage point, or 50 basis point, cut in September, while others complained about the wild swings and miscalculations under Wall Street experts were amazed. David Royal, chief financial and investment officer at financial services firm Thrivent, speculated that “it's doubtful” the Fed would have cut so much “if it had known this report would be so strong.”
“The question is: How come everyone always gets it wrong?” said Kathy Jones, chief fixed income strategist at Charles Schwab. “How come we can’t get this number right with all the information we’re given?”
Jones said the Fed faces a dilemma in finding the right policy response. The next FOMC meeting will take place on November 6th and 7th, immediately after the US presidential election and after a five-week period in which there will be much more to digest.
Some comments after the meeting suggested that the Fed may need to raise its estimate of the “neutral” interest rate, which neither boosts nor restricts growth, an indication that interest rates are settling at higher levels than in the recent past become.
“What is the Fed doing with it? Certainly 50 basis points is off the table for the next meeting. I don’t think there’s anything to be said,” Jones said. “Are you taking a break? Make another 25.” [basis points] because they are far from neutral? Are they simply weighing this against other data that may not be as meaningful? I think they still have a lot to figure out.
In the meantime, however, officials should be content knowing that the economy is stable, the job market isn't struggling nearly as much as suspected and that they have time to consider their next move.
“We've had a pretty remarkable economy over the last few years, despite some critics and weak consumer sentiment,” said Elizabeth Renter, senior economist at NerdWallet. “In an election year, passions run high and any economic report or event can provoke strong reactions. But the overall economic numbers show us that the U.S. economy has been and is strong.”
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