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Federal Reserve policymakers are leaning toward holding rates steady at their October meeting, but a December increase remains likely after a weak September jobs report showed only 29,000 new positions.
Federal Reserve policymakers are likely to skip a second straight rate hike at their October 27-28 meeting, giving them time to assess more economic data before pulling the trigger again.
Jobs Data Shapes Fed Rate Path
A cooler-than-expected September jobs report released Friday has reinforced that approach. Still-to-come data, especially the closely watched consumer price index reading due just before the Fed meets, could shift that calculus. After raising the policy rate by a quarter of a percentage point last month to put inflation on a timelier path toward the Fed's 2 per cent goal, central bankers are weighing the risk of moving too slowly against potential harm to the labour market.
Fed Chairman Kevin Warsh has stuck to his policy of saying nothing about where he thinks the risks lie or where rates may need to go, but his colleagues have not been so quiet. Chicago Federal Reserve President Austan Goolsbee told Fox Business that there is plenty of room for anything to be on the table when asked whether the Fed should raise rates or pause.
Goolsbee Sees Inflation as Main Risk
Goolsbee said the latest jobs data shows the labour market is steady, but he flagged inflation as the bigger concern. He said he thinks the inflation side of the Fed's job is where the problem is and that officials cannot let it get even more out of control. U.S. employers added just 29,000 jobs last month, the Labor Department reported Friday, far below the 90,000 economists had expected.
August payroll gains were revised downward, and the September unemployment rate rose to 4.2 per cent from 4.1 per cent. The increase in unemployment was driven by more entrants to the workforce, while low unemployment insurance claims suggest there is no broad increase in layoffs. Wage growth also slowed, which JPMorgan chief U.S. economist Michael Feroli said should give comfort to Fed policymakers that the economy is not overheating in a way that calls for a hurried rate hike cycle.
After the Fed raised short-term borrowing costs last month, policymakers signalled they would likely deliver at least one more increase by year's end if the Iran war and other shocks pushing up inflation persist. Until early this week, expectations for a brisk series of rate hikes had been rising, along with longer-term bond yields, which hit a 24-year high on Thursday. Mortgage rates topped seven per cent.
Fed Officials Await More Economic Data
Speaking this week, Fed Vice Chair Philip Jefferson and New York Fed President John Williams said they would rather see more data before considering further action, prompting traders to slash bets on a hike at the October meeting. Traders now see about a one-in-four chance of an October rate hike and an overwhelmingly high probability of a December increase, based on CME FedWatch analysis of interest-rate futures prices.
Feroli wrote that it would now take a very strong CPI to make the October meeting live, and that he continues to look for another hike at the December FOMC meeting on the assumption that the September and October price reports show still-sticky trends in core inflation. Fifth Third economist Bill Adams wrote that the September CPI and PPI reports, prices at the pump, and geopolitical developments before the Fed meets next in late October have more power to sway the next rate decision than the jobs report.
Inflation Puts Pressure on Incumbents
Friday's report was the last broad read of the U.S. labour market before November elections that will determine whether U.S. President Donald Trump's Republican party keeps control of both houses of Congress. A rising cost of living amid elevated inflation and higher borrowing costs has put voters in a sour mood about the incumbents' handling of the economy, though economic growth overall has been solid and the labour market has held in.
Inflation by the Fed's targeted measure was 3.4 per cent in August, data showed this week, far above the 2 per cent goal though not as bad as economists had projected.
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