Surprising Job Growth in September Raises Questions for the Federal Reserve

[Zforex]

Surprising Job Growth in September Raises Questions for the Federal Reserve

The payrolls report exceeded expectations, with employers adding 336,000 jobs in September, the highest since January and nearly double the median estimate. Additionally, revisions added 119,000 more jobs for July and August.
The unemployment rate remained at 3.8% due to a surge of previously unemployed individuals re-entering the job market. The participation rate also held steady at 62.8%, and average weekly hours remained unchanged. Wages increased by 0.2% from the previous month, but the annual wage growth slowed to 4.2%.
The job gains were primarily driven by the hospitality-leisure and education-healthcare sectors, reflecting a trend seen in the past year as these industries rebuild after the pandemic, with rising service demand. Restaurant and bar employment has now returned to pre-pandemic levels.
Regarding the Federal Reserve's perspective, while the headline job numbers and wage growth are strong, some concerns arise from the household survey. Average hours worked have remained flat and are below last year's levels, and the participation rate hasn't changed significantly. This suggests that employers may not be drawing more workers from the sidelines. Consequently, there's uncertainty about how the Fed will interpret this report in terms of future interest rate hikes.

 

[Zforex]

Powell's Inflation Challenges, Monetary Policy, and Economic Outlook: A 2023 Analysis

Federal Reserve Chairman Powell faces a complex set of challenges in his efforts to control inflation and steer the US economy toward stability. Inflation levels have undergone a significant shift, with the Core PCE gauge falling below 4.0a% for the first time in over two years, sending positive signals to the market. However, Chairman Powell and the Federal Reserve confront multifaceted inflation challenges.
The recent surge in oil prices has sparked concerns, affecting consumers through higher energy bills and exacerbating inflationary pressures. Furthermore, the labor market's strength, characterized by exceptionally low unemployment levels, has resulted in more significant, sustainable wage hikes. This, in turn, has contributed to inflation, especially in sectors grappling with labor shortages.
The Federal Reserve's decision-making relies heavily on data, and a rate cut is contemplated if certain conditions align. This includes an unemployment rate slightly above 4%, ideally around 4.5%, coupled with slowing wage growth and a core PCE inflation rate below 3%. The potential timeframe for rate cuts appears to be the end of the second quarter of 2024, as historical data suggests that maintaining high rates for an extended period poses risks to the economy.
Chairman Powell and the Federal Reserve find themselves navigating an economy characterized by high inflation levels and a strong labor market. Raising interest rates beyond the 5% threshold is seen as necessary to mitigate inflationary pressures. However, the challenge lies in accurately projecting economic developments and determining the optimal time to commence rate cuts in 2024 to avoid triggering a severe recession.
The long-standing 2% inflation target is under scrutiny, as it may no longer suit current economic dynamics. In the short term, this target appears overly restrictive, especially given recent inflation rates exceeding 8% before declining. Some argue that a 3% inflation target could offer a more balanced approach, alleviating economic pressure without risking a recession.
Shifting bond yields have raised concerns about a potential economic slowdown or recession. Mounting US debt, coupled with a substantial government budget deficit, has led to an oversupply of bonds in the market, contributing to uncertainty in the bond market.
The US stock market displays a notable pattern of reversal, driven by factors such as elevated interest rates, the Federal Reserve's signaling of an extended stance on rate maintenance, and the potential for a year-end rate increase. These elements are creating uncertainty around high-risk assets and affecting investor sentiment.
Yields are benefiting from these circumstances, strengthening the US dollar. Economic data from various developed countries, excluding the US, suggest a potential slowdown in activity. Anticipation is growing that the US may also experience economic deceleration. Consequently, third-quarter earnings may not suffice to drive a stock market rebound, with macroeconomic developments taking center stage.
As Chairman Powell grapples with inflation control and monetary policy, the US economy stands at a pivotal juncture in 2023. Accurate forecasting and timely policy adjustments will be crucial to steer the nation away from recessionary risks. Reevaluating inflation targets and monitoring bond market signals are integral to shaping a resilient and stable economic future.