'A very close call': Economists say long-awaited September jobs report complicates Fed rate cut path

This past week’s release of the long-delayed September jobs report complicates the Federal Reserve’s path forward when the central bank makes its next decision on interest rates in December, Wall Street economists said.

“Hold or cut, there will likely be multiple dissents,” Michael Feroli, chief US economist at JPMorgan, wrote in a research note on Thursday. “We see it as a very close call, closer even than September of last year. Whereas previously we looked for a cut next month, we are now inclined to see the Committee skip next month, but with cuts still coming in January and May before going on hold.”

The September employment report showed that the US economy added 119,000 jobs that month, handily beating economists’ estimates of 51,000, per Bloomberg data. However, payroll data from the summer months was revised downward, and the unemployment rate ticked up from August.

Stocks initially rose following the news on Thursday but ended the day lower. The Federal Open Market Committee (FOMC) is slated to issue its next policy decision on Dec. 10.

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

Comments Federal Reserve Bank of New York president John Williams made on Friday suggested a rate cut was on the table in the near term. Williams said that risks to employment have increased while those to inflation have faded. The Fed has a dual mandate to achieve full employment and price stability.

“I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions,” Williams said in a speech in Santiago, Chile. “Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals.”

Following the comments on Friday morning, markets placed a 73% probability on a rate cut in December, up from 39% a day earlier.

Economists noted that the September jobs report was dated due to the government shutdown and that the fine print wasn’t all positive, despite the headline number beating expectations.

Revisions to earlier data showed that the US economy lost 4,000 jobs in August instead of a previously reported gain of 22,000. In July, it added 72,000 positions, down from the earlier reported 79,000.

The unemployment rate rose slightly to 4.4% from 4.3% the previous month. Meanwhile, the labor force participation rate ticked up to 62.4% from 62.3%.

“We’re seeing here a rise in the unemployment rate at the same time as the labor force participation [rate] is rising,” Gregory Daco, chief economist at EY-Parthenon, told Yahoo Finance in an interview. “So it means that more people are on the sidelines of the labor market as of the end of the summer.”

“The other thing that’s interesting to watch, especially from a Fed perspective, is that we’re seeing downward pressure in terms of wage growth momentum,” he added. “We know that a lot of Fed policymakers are hesitant to ease monetary policy further because of the risk of persistent inflation from tariffs. This type of downward pressure on wage growth is an indication that second round effects via wage growth are unlikely to materialize in a labor market that is softening.”

Kathy Jones, Charles Schwab’s chief fixed income strategist, said that the report wouldn’t change the direction of interest rates on its own.

“It’s pretty old news at this stage of the game and backward-looking,” she said in an interview. “So it will be important to get more current data.”

She added, “We have been in the camp that we’re not looking for a December rate cut, and I don’t think at this stage of the game, this gives the Fed the ammunition it needs to change and cut rates. I think it’s still a divided Fed based on these numbers.”

Anjali Robins is a senior editor at Yahoo Finance.

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