Fed Expected to Slow Rate Cut Pace Following Strong US Jobs Data, Reuters Reports

By Ann Saphir

A significant increase in U.S. job growth has led financial markets to anticipate that the Federal Reserve will implement smaller interest rate adjustments following last month’s half-point cut. This situation has sparked a discussion regarding whether the policy rate will settle at a higher level than previously anticipated.

The Labor Department’s report on Friday showed an addition of 254,000 jobs in September, accompanied by a drop in the unemployment rate to 4.1%. As a result, traders in futures markets, which are tied to the Fed’s policy rate, largely moved away from expectations of another substantial interest rate reduction this year.

Current projections now indicate quarter-point cuts at upcoming meetings, potentially bringing the rate to a range of 3.25% to 3.75% by mid-next year. Although this marks a decrease from the existing 4.75%-5.00% range, it is higher than the previously anticipated endpoint of 3.00%-3.25%.

A policy rate exceeding 3% could still exert some pressure on job creation and consumer spending, as Fed policymakers have identified 2.9% as the "neutral" rate that neither constrains nor enhances economic growth.

BMO economists noted that Friday’s jobs report "is a potential game changer for the Fed and market expectations on the size and pace of future rate cuts." They added that it presents a substantial upside risk to forecasts for consumer spending and GDP growth in the immediate future.

However, expectations may evolve before the Fed’s upcoming policy meeting on November 6-7, which will occur following new inflation data and another monthly jobs report. The Fed has expressed its intent to readjust the policy rate as inflation approaches its 2% target and as the labor market begins to cool.