September jobs report makes Fed next move unclear

A stronger-than-expected — albeit stale — September jobs report is muddying the picture of whether a split Federal Reserve will cut or hold interest rates steady at its next policy meeting.

Experts and markets are divided.

“They will not cut rates,” Wilmer Stith, bond portfolio manager for Wilmington Trust, said Thursday.

While payroll growth was stronger, Stith noted that the unemployment rate on an unrounded basis was 4.44%, which could create concern for some members of the Fed who view a level of 4.5% as cautionary.

“Getting to that 4.5% unemployment would sort of raise their anxieties about the employment situation, and unfortunately, we’re not going to get an unemployment rate for the month of October, so there is poor visibility. It’s really hard to hang your hat on something definitively one way or the other.”

Payroll growth bounced back in September with 119,000 jobs added, compared with economists’ expectations for 51,000. The rebound comes after jobs were revised to negative 4,000 for the month of August, from an initial reading of 22,000 gained. That contributes to a volatile trend where job creation went negative in June, increased in July, decreased again in August, and rebounded again in September.

Read more: How jobs, inflation, and the Fed are all related

Lower immigration is pushing down the supply of workers in the economy, putting the so-called break-even rate — the number of jobs needed to be added to the economy to keep the unemployment rate steady — at a range most Fed officials see between 30,000 and 50,000. The September print of 116,000 trumped that range.

On the flip side, the unemployment rate rose a tenth of a percentage point to 4.4% from 4.3%— a level it had been inching toward over the past few months.

“The delayed September US employment report delivered an unhelpful split verdict,” said Krishna Guha, head of global policy and central banking for Evercore ISI, pointing to the monthly payroll gains and accompanying bump in unemployment.

“This report — stale, noisy, prone to revision — was never going to provide a high-quality steer as to cut or skip in December,” Guha said. “But a clear upside or downside surprise across the report as a whole might well have served as a tie-breaker for a deeply divided Fed. We view the report as close to a wash … that December remains a coin flip with the tiniest bias to a cut.”

The report was initially supposed to be released on Oct. 3 but was delayed due to the government shutdown. The Labor Department says it will not publish an October jobs report, and the November jobs report won’t be released until Dec. 16, nearly a week after the Fed’s policy meeting.

Senior economist Cory Stahle for Indeed.com said while the job gains are encouraging, the roughly seven-week delay limits the report’s usefulness for assessing current conditions.

“What it does show is that the sectors of the economy that were strong prior to the shutdown — namely healthcare and hospitality — remained strong through at least the early fall, even as other fields continued to weaken,” said Stahle.

So far this year, the economy has added an average of 76,000 jobs per month, roughly in line with the updated estimates of job creation needed to keep pace with population growth.

Minutes from the Fed’s last policy meeting, released Wednesday, revealed that while “most” members of the Fed thought that lowering rates would be appropriate as the central bank moves rates toward a neutral setting designed to neither spur nor slow growth, “several” did not think that another 25 basis point cut at the December meeting would necessarily be appropriate.

Still, several said they could foresee cutting rates again in December if the economy plays out as they expect. Still others thought it was appropriate to hold rates steady for the rest of the year.

Markets are pricing in a 43% chance the Fed will cut rates next month, up from 30% on Wednesday.

“This significantly increases the likelihood that Fed policy will not change next month,” said Jerry Tempelman, former senior analyst at the NY Fed and vice president of fixed income research at Mutual of America Capital Management.

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance.

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