Three NFP Jobs Reports and Fed Divisions Have Killed the Fed's Easing Game

TradingKey - Less than a month before the final Federal Reserve meeting of the year, the probability of 2025 interest rate cuts being curtailed from the six initially expected to just two is solidifying into reality. The delayed September Non-Farm Payrolls (NFP) and the ambiguous October NFP have already deepened divisions within the Fed amid a persistent data fog. Making the situation more acute, the December NFP report—released unexpectedly late, after the final Federal Open Market Committee (FOMC) meeting of the year—now stands poised to become the ultimate "final arbiter" in the protracted rate-cut tug-of-war.

Federal Reserve officials, tasked with balancing price stability and full employment, are actively searching for any signs of weakness in the U.S. labor market to justify initiating a rate-cutting cycle in September 2024.

The stagnation in inflation progress this year has undoubtedly presented an obstacle to the Fed's hesitancy on future rate cuts. However, with price costs still manageable, policymakers may remain open to taking preemptive easing measures. This suggests a greater concern for the potential harm arising from downside employment risks.

The record-long U.S. government shutdown has clouded the outlook for rate cuts, introducing significant uncertainty into official employment reports from the U.S. Bureau of Labor Statistics (BLS).

On Wednesday (November 19), the agency finally outlined a clear release timeline for the three affected non-farm payrolls reports, stating that: The September NFP report was issued on Thursday, the October NFP report would not be released, and the November NFP report was delayed until December 16.

The September NFP report, originally slated for October 3, was released 48 days late and is unlikely to boost the probability of rate cuts. Economists anticipate a rise in September's non-farm payrolls to 54,000 from August's 22,000.

Furthermore, the unemployment rate is expected to hold at 4.3%, with average hourly earnings flat month-over-month at 0.3%, matching August's figures.

Some economists suggest that the September NFP report, alongside revised data for July and August, might surpass consensus expectations, yet they emphasize these figures offer little to celebrate.

As anticipated by the market, the BLS officially announced that it would not release the October NFP report. This decision stems from the inability to complete the full collection of employment data during the government shutdown, specifically household survey data critical for calculating the unemployment rate, which relies on manual collection.

Goldman Sachs projects a potential rise in the October unemployment rate. This increase would reflect the forced furloughs triggered by the government shutdown and upward pressure revealed by broader labor market indicators.

The November NFP data, which is slated for release six days after the Fed's December meeting, is proving to be the "final straw" against further rate cuts. The absence of crucial official data before the monetary policy meeting makes it more challenging for policymakers to ascertain the appropriate direction.

Following the BLS's announcement of these report release plans, the probability of a December rate cut plunged from approximately 50% to around 30%. This indicates that traders have largely abandoned hopes for easing in December.

Industry insiders noted that the non-release of the October NFP unemployment rate was anticipated, but the delay of November's data until after the Fed meeting proved disappointing. This development, coupled with the publicly known divisions within the FOMC, further diminishes the likelihood of rate cuts.

Gavin Friend, a Senior Market Strategist at National Australia Bank, stated that from a market perspective, the data uncertainty reinforces the Federal Reserve's inclination to "pause."

TradeStation highlighted that uncertainty remains high due to missing data and the unclear impact of tariffs. Furthermore, there is no consensus within the Federal Reserve, and the latest meeting minutes revealed an overall hawkish leaning.

The minutes indicated strong disagreements among participants regarding the most appropriate policy decision for December when discussing the near-term path of monetary policy. Federal Reserve Chair Jerome Powell stated after the October meeting that a December rate cut was "not a foregone conclusion."

Most participants expressed concerns that further rate cuts could increase the risk of higher inflation becoming entrenched, or be interpreted as policymakers lacking commitment to the 2% inflation target.

Chicago Fed President Austan Goolsbee, in an interview, voiced his concern over inflation, noting that it has exceeded the target for four and a half years and is currently moving in the opposite direction.

Dallas Fed President Lorie Logan commented late last month that supporting another rate cut in December would be challenging without clear evidence of inflation declining faster than anticipated or a more rapid cooling in the labor market.

Economists at Pantheon noted that the committee remains more divided than usual on the next policy step. They added that the BLS's announced release schedule will further reinforce a cautious stance.