Robust jobs report might mean the Fed regrets its rate cut

The Federal Reserve might be experiencing seller’s remorse, or buyer’s remorse—whichever fits its decision to cut interest rates by 50 rather than 25 basis points in September. Why? Because Chair Powell and other officials said they were shifting their focus from inflation to employment as the former has drifted down significantly from the four-decade highs two years ago. Shepherding the labor market is its other Congressional mandate, and policymakers think it has weakened enough to justify concerns the rate tightening regime is finally squeezing companies. Traditionally, this heralds a recession, which Powell desperately wants to avoid.

If the September nonfarm payrolls report not a fluke, then the Fed may have overshot. The Labor Department said the U.S. added a mammoth 254,000 jobs last month, 95,000 more than August and against consensus expectations for around only 150,000. To add fuel to the fire, the department revised the prior two months upward by 72,000 jobs, and the unemployment rate declined from 4.2% to 4.1%.

While the dockworkers’ strike ended after only three days, Americans with a steady paycheck tend to spend. Add to that the rise of oil prices reflecting the expanding conflict in the Middle East, and it’s not out of the question that inflation’s downward progress will stall. Powell’s nightmare scenario of the Fed cutting too soon could be a reality. Unlikely, but in the back of his mind, as he lived through that situation in the 1970s when inflation soared back after the pivot to easing. We think this means the Fed will likely cut rates by a quarter point in November rather than another half-point drop, and who knows that the December meeting will bring. Perhaps not even those in the Eccles building in Washington, D.C.