4 hours ago

An unexpectedly strong September nonfarm payrolls report quickly doused expectations of a big rate cut.

On September 18, 2024, the U.S. Federal Reserve announced that it would lower the target range of the federal funds rate by 50 basis points to 4.75%-5.00%. Source: CFP

Interface News reporter | Liu Ting

After the release of the US September non-farm data report last Friday, market expectations for the extent of the Federal Reserve's interest rate cuts this year reversed sharply.

As of around 19:00 Beijing time on Wednesday, data from the Chicago Mercantile Exchange's Federal Reserve monitoring tool FedWatch showed that the probability of no interest rate cut in November was 11.3%, and the probability of a 25 basis point cut was 88.7%. A week ago, "no interest rate cut in November" was not yet within the scope of market discussion. At that time, the market expected the probability of a 50 basis point cut in November to be 35.2%, and the probability of a 25 basis point cut was 64.8%.

However, the unexpectedly strong non-farm payrolls report quickly dampened expectations of a sharp rate cut. In September, the number of non-farm payrolls in the United States increased by 254,000, far exceeding the market's expectation of about 150,000; the unemployment rate fell by 0.1 percentage point month-on-month to 4.1%. In addition, the Labor Department also raised the number of jobs in the first two months, with the number of new non-farm payrolls in July significantly increased by 55,000 to 144,000. This means that the labor market in late summer is not as weak as the Federal Reserve and economists had previously believed.

The Fed cut interest rates by 50 basis points at its September policy meeting. The Fed’s interest rate path “dot plot” released at the same time showed that interest rates would be cut by another 50 basis points this year, that is, 25 basis points each in November and December. Analysts believe that the reason why the Fed “stride forward” to start the interest rate cut cycle is largely due to a compensatory mentality. The July non-farm payroll data released in early August surprised the market and even triggered Sam’s Law, which predicts an economic recession. Fed Chairman Jerome Powell later said that if he had seen the report before the policy meeting at the end of July, he would have cut interest rates at that time.

However, these have now become evidence for some analysts to mock the Fed's "lack of strategic vision." David Roach, founder of Quantum Strategies, told CNBC that the strong September non-farm data not only suggests that the Fed has no reason to continue to cut interest rates sharply, but also makes people realize that the previous 50 basis point rate cut was a "hasty, stupid, populist and panic" action.

Bank of America released a research report on Monday saying that the unexpected employment report reminded Wall Street that the road to future interest rate cuts may be bumpy, and in the short term, it needs to focus on the upcoming September inflation data.

On Thursday evening Beijing time, the United States will release the September Consumer Price Index (CPI). Bank of America expects the data to be slightly strong, but not to a level that is worthy of concern. According to its forecast, the CPI rose 0.1% month-on-month in September, 0.1 percentage point narrower than the previous month, and the core CPI excluding food and energy prices rose 0.3% month-on-month, the same as the previous month. Bank of America said that if the inflation data is as expected, the Federal Reserve may cut interest rates by 25 basis points in November, but if the data is "unexpectedly hot", then the interest rate cut next month will become less certain.

Fed Governor Adrienne Kugler said in a speech in Germany on Tuesday that if inflation continues to fall, she favors further rate cuts in order to gradually shift to a more neutral policy stance. But if incoming data does not give confidence that inflation is continuing to move toward the Fed's 2% target, the pace of rate cuts may need to be slowed, but any decision to cut will depend on economic data from "a variety of sources."

On the same day, Boston Fed President Susan Collins said that as inflation softens, the Fed is "very likely" to cut interest rates further, and future actions will be driven by data. She also believes that the job market is in a "good, balanced" state, and core inflation has eased, and she is more confident that inflation will continue to fall.

“Looking ahead, maintaining current favorable economic conditions will require adjusting the stance of monetary policy so as not to unnecessarily constrain demand,” Collins said at a community bankers conference in Boston, calling for prudent, data-based policies in achieving the dual goals of price stability and maximum employment.

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