Federal Reserve Chair Jerome Powell has made it clear the central bank isn’t in a "hurry" to bring interest rates down and would prefer smaller cuts, but that patience will be put to the test this fall with a series of closely watched employment reports starting this Friday.
Any new signs of deterioration in the job market could force the Fed to once again cut deeply following an initial half-percentage point reduction last month, despite expectations among policymakers for 25 basis point cuts in November and December.
The destruction caused by Hurricane Helene could offer new complications to that calculus as well, though a huge US ports walkout that also posed a risk has ended for now after a tentative wages deal was agreed.
A fresh look at the labor market due out Friday is expected to reinforce a trend of gentle cooling, with economists forecasting 146,000 jobs created last month and the unemployment rate holding steady at 4.2%. Such a report would be roughly in line with 142,000 jobs created in August.
The focus will likely be on any revisions to past labor market reports, which have been consecutively revised lower. July’s surprisingly weak jobs report, for example, was revised even lower to a paltry 89,000 jobs.
Investors will be on the lookout for whether the downward revisions continued in August, offering another sign that perhaps the job market is not as strong as it was viewed to be at first blush.
One Fed official, Richmond Fed president Tom Barkin, said Wednesday that the job market remains in "good shape," pointing to an average of 116,000 jobs added per month over the last three months.
He admitted the hiring rate has dropped to 2013 levels, job gains are being continually revised down, and sectors like healthcare that have been catching up from pandemic shortages are moderating their growth.
"But while employers aren’t hiring, they also aren’t firing: The layoff rate is near 25-year lows and initial claims remain muted," Barkin said.
"This low hiring-low firing environment is unlikely to persist, but again, I could make a case that it could evolve in either direction."
Powell indicated earlier this week that the central bank's rate-setting committee expects to continue reducing rates at a measured pace.
"This is not a committee that feels like it is in a hurry to cut rates quickly," Powell said Monday during an appearance before the National Association for Business Economics annual meeting in Nashville.
Federal Reserve Board Chairman Jerome Powell speaks during a news conference on Sept. 18. (AP Photo/Ben Curtis, File) ·(ASSOCIATED PRESS)
He also reiterated that the consensus of Fed officials outlined at the September meeting was for two more 25 basis point rate cuts this year.
“It wouldn't mean more fifties,” Powell said.
If the economy slows more than expected, however, the committee can cut faster, he added.
"We will do what it takes in terms of the speed with which we move," he said.
'Why take chances?'
The Fed could encounter more complications with the October jobs report, which is due to be released just before the central bank’s Nov. 6-7 meeting.
It could show weak job gains, albeit temporarily, depending on a machinists strike that halted production of Boeing (BA) planes in the Pacific Northwest, and the unfolding impact of Hurricane Helene. The dockworkers strike affecting ports from Maine to Texas risked a bigger impact before Friday's return to work.
JPMorgan economists estimate shutting down the East and Gulf Coast ports could have an economic impact of between $3.8 billion to $4.5 billion per day, some of which would be recovered after a return to normal operations over time. Thursday's deal to suspend the union walkout eases that risk.
Union members strike at the Bayport Container Terminal on Tuesday in Houston. (AP Photo/Annie Mulligan) ·(ASSOCIATED PRESS)
For every day of a strike, it takes up to six days to get ports operating at normal function, said TD Cowen analyst Chris Krueger, citing estimates. A three-day strike would take 18 days to cycle through.
Some observers said the impact of the strikes and storm will be temporary and the Fed will likely look through that unless there’s something more fundamental happening.
But "any notable weakening in payroll growth and large rise in the unemployment rate could tip the scale in favor of another 50bps rate cut for data-dependent Fed policymakers," said EY senior economist Lydia Boussour.
Jan Hatzius, chief economist for Goldman Sachs, said for the ports strike to weigh on October payrolls, it would need to last the entire period during which the Labor Department conducts its employment surveys.
If the strike lasts through the reference period, said Hatzius, it would directly weigh on October payroll growth by 45,000 — the number of dockworkers on strike — but the effect would subsequently reverse upon the end of the work stoppage.
But Neil Dutta, head of economic research at Renaissance Macro Research, does expect more jumbo-sized rate cuts of 50 basis points in November and December due to complications from the strikes and hurricane damage.
"Yes, these issues might be temporary and will show up more in the Establishment Survey than the Household one, but I don’t think the Fed should ignore them given the balance of risks. Why take chances with inflation resolved?"
