U.S. Federal Reserve policymakers were already leaning against delivering a second straight rate hike this month to give them time to sift through more economic data before pulling the trigger again, and a cooler than expected job market report Friday leaves that approach intact.
Still-to-come data, particularly the closely-watched consumer price index measure of inflation coming just before the Fed’s October 27-28 policy meeting, could yet shift that calculus.
After increasing the policy rate by a quarter of a percentage point last month to put inflation on a “timelier” path toward the Fed’s two per cent goal, U.S. central bankers are now weighing the risks of moving too slowly to tamp down price pressures against potential harm to the labour market should they move too fast.
Fed Chairman Kevin Warsh has stuck to his policy of saying nothing about where he thinks the risks lie and where rates may need to go, but his colleagues have not been so quiet.
“There is plenty of room for anything to be on the table” was how Chicago Federal Reserve President Austan Goolsbee put it, when asked by Fox Business’ Edward Lawrence if the Fed ought to raise rates or pause at their next meeting.
Goolsbee said he felt latest jobs data shows the labour market is steady.
“I think the inflation side of the Fed’s job, that’s where the problem is. We’ve got to keep an eye on that. We can’t let that get even more out of control,” Goolsbee said.
U.S. employers added just 29,000 jobs last month, the U.S. Labor Department reported Friday, less than the 90,000 economists had expected and August payroll gains were revised downward.
The September unemployment rate was 4.2 per cent, up from 4.1 per cent. But the increase was driven by an increase in entrants to the workforce, and low unemployment insurance claims suggest there’s no broad increase in layoffs. Wage growth slowed.
After the Fed raised short-term borrowing costs last month, policymakers signalled they will likely deliver at least one more increase by year’s end if the Iran war and other shocks that have pushed up inflation persist.
Until early this week, with a peace deal elusive and trade tensions also on the front burner, 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.
But 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 Fed’s October meeting.
Friday’s report showing a deceleration in wage growth “should give comfort to Fed policymakers that the economy is not overheating in a way that calls for a hurried rate hike cycle,” wrote JPMorgan chief U.S. economist Michael Feroli.
“It would now take a very strong CPI to make the October meeting live. We continue 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.”
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 both 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 labor market has held in.
Traders now see about a one-in-four chance of an October rate hike, and an overwhelmingly high probability of a December increase, based CME FedWatch’s analysis of interest-rate futures prices.
Inflation by the Fed’s targeted measure was 3.4 per cent in August, data showed this week - far above the two per cent goal though not as bad as economists had projected.
“The September CPI and PPI reports, prices at the pump, and geopolitical developments between now and when the Fed meets next in late October have more power to sway the next rate decision than this jobs report,” wrote Fifth Third economist Bill Adams.
(Reporting by Ann Saphir and Lucia Mutikani; Editing by David Goodman, Chizu Nomiyama and Nick Zieminski)
