Federal Reserve Chairman Jerome Powell has made clear the Fed is in no rush to lower interest rates and prefers smaller cuts, but that patience will be tested this fall with a series of closely watched employment reports starting on Friday.
If there are any new signs of deterioration in the job market, the Fed may be forced to cut interest rates again significantly after an initial cut of half a percentage point, even if policymakers expect to reduce interest rates by 25 basis points in November and December.
Massive port closures due to dockworker strikes and damage from hurricanes could also introduce new complications into the calculation.
The latest job market data due on Friday is expected to reinforce the mild cooling trend, with economists forecasting 146,000 jobs created last month and the unemployment rate unchanged at 4.2%. Such a report would be roughly in line with the 142,000 jobs created in August.
The focus is likely to be on any revisions to past employment reports, which have been revised downwards in quick succession. For example, July’s surprisingly weak employment report was revised further down to just 89,000 jobs.
Investors will be watching closely to see whether the downward revision to August continues, which could be another sign that the job market is not as strong as it initially appears.
Richmond Fed President Thomas Barkin said Wednesday that the job market remains in "good shape," noting that job gains have averaged 116,000 per month over the past three months. He acknowledged that hiring has fallen to 2013 levels, that payrolls continue to be revised downward, and that areas like health care that are recovering from pandemic shortages are slowing growth.
“But while employers aren’t actively hiring, they’re also not laying off workers: Layoffs are near 25-year lows, and initial jobless claims remain low,” Barkin said. “This low-hiring-low-layoff environment is unlikely to last, but equally I’d say it could evolve in either direction.”
Powell said earlier this week that the Fed's rate-setting committee expects to continue cutting interest rates at a cautious pace.
“This is not a committee that is in a rush to cut rates quickly,” Powell said in a speech to the annual meeting of the National Association for Business Economics, reiterating that the consensus outlined by Fed officials at their September meeting was for two more quarter-point rate cuts this year.
"That doesn't mean there will be more 50 basis points of rate cuts," Powell said. However, he added that the committee could cut rates more quickly if the economy slows more than expected. "We will do what's necessary based on the speed of our actions," he said.
The Fed may face more complications with the October jobs report, due before its upcoming Nov. 6-7 meeting. The report is likely to show temporarily weak job growth due to a dockworker strike, a strike by skilled workers that affected Boeing aircraft production and the impact of hurricanes.
Economists at JPMorgan Chase & Co. estimate that closing East Coast and Gulf Coast ports could generate $3.8 billion to $4.5 billion in economic losses per day, some of which could be recouped once normal operations resume.
TD Cowen analyst Chris Krueger cited estimates that each day of the strike would take up to six days to get the port back to normal function. Three days of strike would take 18 days to resolve.
Some observers say the impact of the strike and storm will be temporary and likely to be ignored by the Fed unless more fundamental changes occur.
But "any significant weakening in wage growth and a sharp rise in unemployment could tip data-reliant Fed policymakers toward another 50 basis point cut," said Lydia Boussour, senior economist at Ernst & Young.
Jan Hatzius, chief economist at Goldman Sachs, said that for the port strike to affect wage growth in October, it would have to last throughout the Labor Department's employment survey period.
Had the strike lasted into the reference period, it would have directly reduced wage growth in October by 45,000 jobs - the number of longshoremen on strike - but the effect would have been reversed after the stoppage ended, Hatzius said.
But Neil Dutta, head of economic research at Renaissance Macro Research, expects two larger 50 basis point rate cuts in November and December because of complications caused by strikes and hurricane damage.
“Yes, these issues may be temporary and more evident in business surveys than household surveys, but given the balance of risks, I don’t think the Fed should ignore them,” Datta said. “Why take the risk when the inflation problem is solved?”
Article forwarded from: Jinshi Data
