Markets convinced Fed will cut by 25bps after ‘very, very good’ jobs report

The next Federal Reserve rate decision may still be one month away, but traders are increasingly confident the Fed will cut by 25 basis points in November after seeing September’s jobs report. In new data out Friday, Oct. 4, the Bureau of Labor Statistics reported the U.S. economy added a surprise 254,000 jobs in September, 104,000 jobs more than economists anticipated, while the unemployment rate lowered to 4.1%.

The Fed cut its benchmark interest rate for the first time in four years in September. After seeing inflation slow closer to its 2% target and unemployment on the rise, Fed Chair Jerome Powell declared, “The time has come for policy to adjust.”

The declaration followed a weak July jobs report, showing unemployment rising to 4.3% and employers adding 114,000 jobs, much lower than the 12-month average.

In the latest data, the BLS revised up July’s data to 144,000 jobs added. The Bureau also revised August’s numbers up to 159,000 from 142,000.

“We were all sort of wringing our hands, and we thought the labor market was a lot weaker than we had expected,” former Acting and Deputy Labor Secretary Seth Harris told Straight Arrow News of July’s jobs report. “And of course, after this survey was taken, the Federal Reserve cut interest rates by 50 basis points, which is intended to strengthen the labor market.

“And then it turns out that, from this report, the labor market actually was a little bit stronger than we thought it was,” Harris continued. “Now, that’s not to say the Federal Reserve got it wrong. I don’t think they got it wrong. I have been calling for rate cuts for about six months now…But what this tells us is the labor market is very resilient. It is still quite strong. It is doing well.”

Harris, who is now a distinguished professor of practice at Northeastern University and a senior fellow at the Burnes Center, said he still believes the Fed should move forward with a 25-basis-point cut at their next meeting in November.

The market agrees.

In the 15 minutes following the release of September’s jobs data, the probability of a 25-basis-point cut in November went from 68% to 87%, according to CME FedWatch. Within two hours of the data release, that skyrocketed to 97%.

“I just think 25 basis points makes a lot of sense,” Harris said on Straight Arrow News’ live broadcast following the jobs report. “There’s some volatility in the labor market. That is the big story here, is we thought things weren’t going so well [when] they were actually going moderately, not great. This is, I would say, a very, very good number.”

“At the end of the day, they’re also trying to set a tone for the economy. Twenty-five basis points is a gentle nudge that we’re moving towards growth: Everybody loosen up a little bit. Start spending, start hiring, start moving a little bit more, not too fast, but a little bit more,” he said of the Fed’s desired rate-cut messaging.