The November U.S. jobs report revealed continued strength in the labor market, albeit with signs of cooling, reinforcing expectations for a Federal Reserve interest rate cut this month. However, debate is emerging among Fed officials regarding the pace of future rate reductions in the new year.
U.S. employers added 227,000 jobs in November, rebounding from a hurricane-affected October. However, the unemployment rate edged up to 4.2%, according to the Labor Department. While average monthly job gains over the past six months have fallen below 150,000 – less than some policymakers believe necessary to keep pace with population growth – the data doesn’t indicate the economic collapse feared when rate cuts began.
Several Fed officials on Friday signaled support for continued rate reductions, but with a more cautious tone regarding the pace. San Francisco Fed President Mary Daly described the labor market as being in a “good position.” While she didn’t express opposition to another rate cut in December, she advocated for a “more thoughtful and cautious approach” as the policy rate nears its eventual target, which she previously estimated around 3%.
Similarly, Chicago Fed President Austan Goolsbee anticipates “rates are going to be a fair bit lower than where they are today” by next year, with the Fed gradually determining the appropriate stopping point for rate cuts. In her first major policy address since assuming leadership of the Cleveland Fed in August, Beth Hammack also supported lowering rates over time. However, citing persistent inflation and a robust labor market, she suggested “we are at or near the point where it makes sense to slow the pace of rate reductions.”
Following the jobs report, traders estimated an 85% probability of a rate cut at the Fed’s December 17-18 meeting, up from under 70% beforehand. Market expectations also shifted towards a slower pace of rate reductions next year, anticipating a 75 basis point decrease in short-term borrowing costs – less than Fed officials projected in September. These projections will be updated at the December meeting.
A quarter-percentage-point reduction this month would lower the Fed’s policy rate to the 4.25%-4.50% range, a full percentage point below its September level when the easing cycle commenced.
“It’s not exactly a wonderful economy, but it’s also an economy that doesn’t seem to be decelerating as sharply as everyone expected a few months ago,” observed TD Securities analyst Gennadiy Goldberg, referencing the recent average payroll growth of around 150,000 jobs. “The Fed can safely deliver another rate cut in December and then maybe communicate a possible pause coming as soon as the January meeting.”
Earlier in the week, Fed Governor Christopher Waller indicated he was “leaning towards” a rate cut but would defer a final decision until reviewing the latest jobs and inflation data.
Fed Chair Jerome Powell reiterated his previous stance that the central bank should exercise caution in managing the final stages of its three-year battle against inflation. Powell’s cautious approach may become more prominent next year, with many analysts predicting a pause in the easing cycle after a December 18 rate cut. However, some Fed officials, like Governor Michelle Bowman, favor a more restrained approach, citing concerns about elevated inflation and a near-full employment labor market. She expressed a preference for “proceed[ing] cautiously and gradually in lowering the policy rate.”
In conclusion, the November jobs report supports a December rate cut by the Federal Reserve. However, the future pace of rate reductions remains uncertain as policymakers debate the optimal approach given the evolving economic landscape. The December meeting will provide further clarity on the Fed’s strategy moving forward.
