Recently, many people are confused about U.S. employment data and Federal Reserve policies, being unsettled by the September non-farm data surpassing expectations one moment, and worrying about a sudden hawkish move from the Federal Reserve the next. Ultimately, it boils down to not grasping the core logic — the Federal Reserve is not going to foolishly make decisions based on a single month's data!
Let's first talk about the September non-farm payroll data that many find perplexing. There were 119,000 new jobs added, which seems impressive at first glance, but Federal Reserve's Williams says the labor market is cooling down. Why is that? The reason is quite obvious; this data is fundamentally superficial. On one hand, this data was delayed for two months due to the U.S. government shutdown, significantly diminishing its timeliness and reference value; on the other hand, most of the new jobs are temporary and government-assisted positions, while full-time jobs have actually been decreasing. More critically, the unemployment rate has risen to 4.4%, a new high since 2021. In the years following the pandemic, non-farm employment has been on a downward trend, and the unemployment rate has been gradually increasing. A single month's data rebound is like a fever temporarily subsiding when one is sick; it does not indicate that the body is recovering.
Let's talk again about the headache-inducing issue of inflation. Some people feel that the CPI is still around 2.7%, and the core CPI is as high as 3.3%. Will the Federal Reserve turn hawkish because they haven't managed to bring inflation down to 2%? This is purely unnecessary worry. The CPI year-on-year compares with last year; the current 2.7% is not low, but it has decreased significantly from the highs of the past two years. Moreover, November's data shows that key items such as housing costs and core services are cooling down, and the upward pressure on inflation is becoming smaller. More importantly, the U.S. economy can no longer withstand interest rate hikes or maintaining high rates. The government shutdown in November set a record, and Moody's analysis suggests this could lower GDP growth by 1 to 2 percentage points in the fourth quarter. Companies are beginning to postpone hiring and even lay off employees; if they don't loosen up, the economy is really going to face major issues.
So the Federal Reserve's strategy is particularly clear now: a little rate cut, take one step at a time. They cut rates three times in the fourth quarter of last year and paused to observe this year. When the economic pressure rises in the fourth quarter, they will naturally start cutting rates again. The market now predicts that the probability of a rate cut in December is close to 90%, and large institutions like Goldman Sachs also say that unless inflation suddenly spirals out of control, a rate cut is basically a done deal. Even if the data for October is incomplete, the dismal economic situation in November provides sufficient reason for a rate cut: government shutdown, turmoil in the stock market, and declining job quality; these situations are obvious.
Is there a high possibility that the Federal Reserve will take a hawkish stance? I think there is basically none. The Federal Reserve is also in a dilemma now, but they must choose a side. Although inflation has not yet reached the target, the downside risks to the economy and employment have become more urgent. It is highly likely that there will be a 25 basis point rate cut in December, and then they will pause in the first quarter of next year to observe, waiting for inflation to further decline and economic data to become clearer before continuing to cut rates. After all, inflation is expected to drop to around 2.4% by 2025, leaving plenty of room for rate cuts.
In summary, don’t be fooled by single-month data; the foundation of the U.S. economy is already weak. What the Federal Reserve should do now is to cut rates in accordance with the trend to support the economy. Taking a hawkish stance is neither necessary nor feasible. The December meeting is likely to reassure the market, so let's wait and see the results.
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