Fed Close to Achieving Elusive Economic Soft Landing in 2024 After Excellent September Jobs Report

The huge job gain in September lifts the US economy out of the shadows of recession and gives the Federal Reserve a fairly open path to a soft landing.

If that sounds like a Goldilocks scenario, it’s probably not far from it, even with lingering inflation concerns putting pressure on consumers’ wallets.

A gravity-defying labor market, at least a slowdown in the pace of price increases, and a drop in interest rates put the macro picture in a pretty good place right now: a politically critical moment and political.

“We’ve been hoping for a soft landing. This just gives us more confidence that it appears to stay that way,” Beth Ann Bovino, chief economist at US Bank, said after Friday’s nonfarm payrolls report. “It also increases the possibility of a non-landing, which means even stronger economic data for 2025 than we currently expect.”

The jobs count was certainly better than virtually anyone had imagined, as business and government combined to increase payrolls by 254,000, surpassing the Dow Jones consensus of 150,000. It was a big step forward even from August’s upwardly revised numbers and reversed a trend that began in April of slowing employment numbers and growing concern about a broader slowdown, or worse.

Beyond that, it all but eliminated any chance of the Federal Reserve repeating its half-percentage point cut in interest rates from September any time soon.

In fact, futures markets reversed their positioning after the report, pricing in an almost certain chance of just a quarter-point move at the November Fed meeting, followed by another quarter-point in December, according to the FedWatch indicator. of the CME Group. Previously, markets had been expecting a half-point cut in December, followed by the equivalent of quarter-point cuts at each of the eight Federal Open Market Committee meetings in 2025.

But no more, since the Federal Reserve, unless there are more disappointments in the labor market, can continue a moderate pace throughout its easing cycle.

“If we continue to see a stronger-than-expected economy, that may give the Fed reason to slow the pace of rate cuts through 2025, with a slightly higher exit rate than they currently expect, and all with the economy still maintaining its strength,” said Boviño. “That would be good news for both the Fed and the economy.”

To be sure, there are still some imperfections in the employment landscape.

More than 60% of September’s growth came from the usual suspects (food and beverage establishments, healthcare and government), which have all been beneficiaries of the fiscal largesse that has pushed the 2024 budget deficit to the brink of $2 trillion. dollars.

There were also some technical factors in the report, such as a low response rate from survey participants, that could cast some clouds over Friday’s sunny report and lead to downward revisions in the coming months.

But overall the news was very good and raised questions about how aggressive the Federal Reserve will have to be.

Economists at Bank of America, for example, asked, “Did the Federal Reserve panic?” in a note to a client that referenced the cut of half a percentage point, or 50 basis points, in September, while others wondered about the wild vacillations and miscalculations among Wall Street experts. David Royal, chief financial and investment officer at financial services firm Thrivent, speculated that “it’s doubtful” the Fed would have cut as much “if it had known this report would be so strong.”

“The question is: how come everyone keeps getting it wrong?” said Kathy Jones, chief fixed income strategist at Charles Schwab. “How is it possible that we can’t get all the information we get right?”

Jones said the Federal Reserve will face a dilemma as it finds the right policy response. The FOMC will next meet on November 6-7, just after the US presidential election and after a five-week gap during which it will have much more to digest.

Some comments after the report suggested that the Federal Reserve may have to raise its estimate of the “neutral” interest rate that neither boosts nor restrains growth, an indication that benchmark interest rates will stabilize somewhere higher than in the recent past.

“What’s the Fed doing with this? Certainly 50 basis points are off the table for the next meeting. I don’t think there’s any argument for that,” Jones said. “Do they take a break? Do they do another 25?” [basis points] Because they are still far from being neutral? Do they just compare this to other data that might not be as strong? “I think they have a lot to figure out.”

In the meantime, however, officials are likely to be content knowing that the economy is stable, that the labor market is not in as much trouble as suspected and that they have time to weigh their next move.

“We’ve witnessed a pretty remarkable economy in recent years, despite some naysayers and lackluster consumer sentiment,” said Elizabeth Renter, senior economist at NerdWallet. “In an election year, passions run high and every economic report or event can generate an intense reaction. But economic aggregates tell us that the American economy has been and is strong.”