Jobs Report Should Not Eliminate 50-Basis Point Fed Cut in November

The recent nonfarm payrolls report released on Friday should not completely eliminate the possibility of a significant interest rate cut by the Federal Reserve at its November meeting, despite some traders scaling back their expectations for a major reduction, according to analysts from Bank of America.

The analysts suggest that market pricing will likely remain divided between a cut of 25 and 50 basis points. In their client note, they anticipate that the U.S. economy added around 150,000 jobs in September, with the unemployment rate expected to remain steady at 4.2%.

They assert, “The Fed would likely consider such data to be consistent with their forecasts.” Their base case prediction indicates that while the market may slightly reduce expectations for a November rate cut, there will still be room for a potential 50 basis point cut.

As investors prepare for the Federal Reserve’s upcoming meeting, they are advised to closely monitor labor market data. Additionally, easing inflation figures could also bolster the case for a substantial cut, the analysts noted.

Last month, the Fed reduced rates by half a percentage point, a decision officials later described as a strategy to enhance labor demand amidst declining price pressures. On Monday, Fed Chair Jerome Powell indicated that the Fed is likely to shift towards more conventional quarter-point interest rate cuts in the future, but he emphasized that the trajectory for interest rates remains flexible. Powell also noted that the rate-setting Federal Open Market Committee is not in a rush to implement swift rate cuts.

He defended the larger cut from last month as a sign of the FOMC’s increasing confidence that, with a proper adjustment of policy, labor market strength could be maintained alongside moderate economic growth and a sustainable decrease in inflation to 2%.

Interestingly, U.S. job openings saw an unexpected slight rise in August, suggesting some resilience in the cooling labor demand during the third quarter. The Job Openings and Labor Turnover Survey revealed an increase in available positions to 8.040 million by the end of August, up from a revised count of 7.711 million in July. Economists had anticipated a small decline to 7.640 million in the latest JOLTS report.

In July, job openings had dropped to their lowest level in three and a half years, which was interpreted as a potential indication of a slowing U.S. job market, albeit in a measured manner.