Now what?

September's non-farm payrolls report, released this morning by the Bureau of Labor Statistics, came in way above market expectations. What does this mean for the US economy and for the direction of Federal Reserve policy? 

Employment rose by 254,000 in September, more than 100,000 above the level markets had expected. This is comfortably higher than the average monthly gain of 203,000 posted over the past twelve months. Moreover, the relatively weak monthly increases reported for July and August were revised higher by a total of 72,000 jobs.  For the second straight month, the unemployment rate ticked down, to stand at 4.1 percent. Average hourly earnings rose 0.4 percent in the month to stand 4.0 percent higher than a year earlier, and are now reliably running ahead of the rate of inflation. 

Recent Fed-speak, including the statements made after last month's FOMC rate cut, have clearly shown that the Fed is now largely convinced that it has got inflation under control, allowing it to focus more on signs of weakening in the jobs market. To the extent that the Fed was using the July and August non-farms data as evidence of that weakening, the upward revision of the data for those months might be seen as a sign that the 50 basis point cut was an over-reaction. The strong September data certainly suggests the same thing. In that case, it would be reasonable to expect that the two remaining FOMC meetings this year will bring smaller rate cuts, or even conceivably a pause in the easing cycle as the Fed waits for more data to come in. 

There are at least two factors complicating the near-term rate outlook. First, the October jobs numbers are likely to be messy, thanks to the strike at Boeing, the strike (albeit now over) at East Coast ports and the lingering impact of Hurricane Helene.  (Note, however, that in reporting today's numbers the BLS said that Helene has had no measurable impact on the data).  These factors may all bias the October data downwards, but given the statistical "noise" in the numbers, the Fed will react cautiously. Second, the ever-expanding mayhem in the Middle East may push global oil prices sharply higher, which would affect prices in the US even though it is no longer reliant on energy supplies form that region. 

The next FOMC meeting is set to take place right after election day.  While it is quite possible (to say the least) that the outcome of the vote will not be known by the time the Fed makes its announcement, there is no risk that whatever decision is announced can be construed as "political". Barring any major surprises in the data flow, the likeliest outcome in both November and December is for a 25 basis point rate cut, but a pause in the easing cycle becomes more likely as we move into the new year.