Employment Report Doesn’t Settle The Fed’s Rate Cut Debate

Thursday’s report on job growth and unemployment in September shed light on the health of the job market but didn’t make clear whether the Federal Reserve needs to save it by cutting interest rates. 

The report, which showed the job market added an unexpectedly high 119,000 jobs in September, did little to shift expectations about whether the Federal Open Market Committee will cut interest rates when it next meets in December.

Financial markets were pricing in a 40% chance of a rate cut Thursday morning, up from 30% the day before, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

Fed officials have been eager for any scrap of data indicating the health of the job market as they debate whether to cut interest rates to boost hiring with easy money or keep rates higher for longer to combat inflation.

The Fed’s dual mandate from Congress requires it to keep inflation low and employment high; officials are sharply divided about whether high inflation or the threat of mass layoffs poses the bigger threat to the economy right now. The 43-day government shutdown that ended last week delayed or cancelled much of the data Fed officials need to make that decision.

The Fed held its key interest rate steady for most of the year in an effort to quell inflation, and cut it by a quarter-point at each of its meetings in September and October after the job market slowed down suddenly in the summer.

Amid the data blackout, the September jobs report was a spot of light but not enough of one to decisively favor either the “hawks” or the “doves” on the FOMC. For one thing, the data was out of date. Since the period it covers, the Fed has cut interest rates twice and the government shutdown rattled the economy.

For another, the report itself was mixed, showing an uptick in job creation and the unemployment rate, while wages continued to rise.

“The report may function as something of a Rorschach test for a deeply divided Fed,” Jake Krimmel, chief economist at Realtor.com wrote. “Inflation hawks will point to still-solid payroll gains and wage growth running at nearly 4% annually as evidence that the Fed should avoid cutting again too soon. Doves will counter that the unemployment rate is finally showing some troubling signs: edging toward 4.5% in September may mean we are already there right now in mid-November, let alone December.”

Thursday’s report was the last major data on the job market that the Fed will get from the government’s statistical agencies before its meeting Dec. 9 and 10. The November jobs report was delayed until Dec. 16 by the shutdown and the October jobs report was cancelled because the bureau did not carry out the surveys it uses to create the reports.