Strong jobs data suggests steady, not sharp, rate cuts

What happened?

The US employment report for September came in much stronger than expected. The economy added 254K jobs, higher than the prior month’s 159K (including revisions) and expectations of 150K. The total revisions for the past two months added another 72K employees to the total workforce. The unemployment rate fell to 4.1% with rounding (it was close to the threshold to be rounded to 4.0%) and wages grew 0.4% versus the prior month and 4.0% versus the prior year, also ahead of expectations. The labor force participation rate held steady at 62.7%.

All of this is good news from an economic perspective. It confirms the labor market is strong, and with labor income the main driver of consumption, and consumption the main driver of economic activity, that bodes well for the economy overall. It does, however, mean that the market will have to reprice its expectations around the Fed’s rate cutting cycle.

Implications for the Fed’s rate cuts

The major economic question raised by this data is whether the economy is reaccelerating or whether the strength is simply due to normal volatility in the data. We expect it’s the latter, as was the case with the weaker prints over the summer. When looking at multi-month averages to smooth the data, those have moved meaningfully lower over the last two years, consistent with a normalizing labor market. We believe that trend is intact and that it supports the Fed cutting rates over time—if inflation and employment are both normal, then interest rates should be as well.

Recent Fed speakers, including Chair Powell, have said the committee is in no rush to cut. This latest data illustrates why. Prior to this data’s release, the question being considered by the market was whether the Fed would cut by a quarter-point or a half-point in November. Now the question is whether they’ll cut at all or skip a cut at this meeting. We expect that, pending the October labor market report, they’ll likely proceed with a quarter-point cut on November 7.