Fed on Track for Another Rate Cut

A weak October employment report keeps Federal Reserve officials on track to cut interest rates by a quarter point when they meet next week and gives them room to continue lowering borrowing costs.

Non-farm payrolls increased just 12,000 last month, but the figures were likely distorted by two hurricanes and a major strike at Boeing Co., the Bureau of Labor Statistics (BLS) said. Hiring in August and September, however, were weaker than previously estimated, according to data released Friday, while the unemployment rate held steady at 4.1 percent.

The muddied report provides more evidence that the labor market is still down-shifting from the overheated levels seen a few years ago, supporting the case for Fed officials to keep dialing back the restrictive rates they put into place to quash inflation.

“It removes all doubt that you are going to get a 25 basis point [bps] cut in November and another 25 basis point cut in December,” said Steven Blitz, chief U.S. economist at TS Lombard.

Blitz expects the Fed to lower rates to a range of 4 percent to 4.25 percent before pausing. That’s 75 bps lower than the central bank’s benchmark rate is currently. “The Fed is going to take these downward revisions to August and September seriously,” he added.

Job openings are declining, and the Fed’s Beige Book showed economic activity was flat in most parts of the United States since early September.

Policymakers lowered their benchmark rate by a half point in September, a larger-than-typical move that officials said was meant to prevent further weakness in the labor market. Projections released at the meeting showed the officials narrowly penciled in another half point of rate reductions for the rest of the year, implying a quarter-point cut at each of their two remaining meetings, according to the median forecast.

Several officials speaking since the meeting have said they prefer a gradual approach to further rate cuts after data suggested the economy is still robust. The U.S. economy expanded at a 2.8 percent annualized pace in the third quarter, driven by strong consumer spending, according to an initial estimate of gross domestic product (GDP) released on Wednesday.

Policymakers are widely expected to lower borrowing costs by a quarter point when they meet next week following the presidential election, according to pricing in futures contracts.

The BLS said it’s likely that hurricanes Helene and Milton affected payroll estimates for some industries last month, but said it is not possible to quantify how much the storms affected the monthly estimates for payrolls, earnings and hours worked.

“The key message is that this report is not changing, directionally, where we were coming into the report,” said Josh Hirt, senior U.S. economist at Vanguard. “We do view this as a healthy labor market. On both the jobs and labor supply side, absent today, we’ve generally seen year to date very healthy gains with both sides of things.”

.

Copyright 2024 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.