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MACRO ANALYSIS: No Less Sensitivity To Labor Softening After FOMC Recalibration

MACRO ANALYSIS
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  • Yesterday’s FOMC meeting saw the median FOMC participant mark up their U.S. unemployment rate forecast by four tenths to 4.4% for 4Q24 to better reflect of course what has been a surprisingly swift increase to 4.22% as of August.
  • That also sees the median participant now expecting the near-term unemployment rate to shift to a level that previously only the most dovish FOMC participants had pencilled in back in June.
  • Importantly though, the median view is then for no further labor market deterioration thereafter, with an unemployment rate also at 4.4% for 4Q25 before actually declining to 4.3% for end-2026 and seen at 4.2% for both 2027 (first estimate) and the longer run (unrevised from June). From 4.22% currently having been 3.66% at the start of the year, it really doesn't take much to be staring down those end-2025 forecasts for the u/e rate within a couple months.
  • The median dot sees 50bp of cuts for the two meetings left this year and then 100bp of cuts through 2025 to a 3.25-3.5% range as part of this forecast.
  • The market remains more dovish than the Fed with Dec’25 Fed Funds futures implying an effective rate of circa 2.85%, i.e. approximately 50bp of cuts more than the Fed and so is already factoring in some additional labor weakness.
  • Nevertheless, expect particular sensitivity to any adverse labor market surprises, which quickly brings us to today’s jobless claims data and with the initial print covering the payrolls reference period for the September report.  
  • Steady jobless claims data helped partly drive the market stabilization towards expecting a 25bp cut for yesterday’s meeting (prior to blackout steers given to the WSJ/FT). When asked about rising layoffs yesterday, Powell said: “As you know, we're not seeing rising claims. We're not seeing rising layoffs and we're not hearing that from companies. That is something that's getting ready to happen. So we're not waiting for that. There is thinking that the time to support the labor market is when it is strong and not when we begin to see layoffs”.
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  • Yesterday’s FOMC meeting saw the median FOMC participant mark up their U.S. unemployment rate forecast by four tenths to 4.4% for 4Q24 to better reflect of course what has been a surprisingly swift increase to 4.22% as of August.
  • That also sees the median participant now expecting the near-term unemployment rate to shift to a level that previously only the most dovish FOMC participants had pencilled in back in June.
  • Importantly though, the median view is then for no further labor market deterioration thereafter, with an unemployment rate also at 4.4% for 4Q25 before actually declining to 4.3% for end-2026 and seen at 4.2% for both 2027 (first estimate) and the longer run (unrevised from June). From 4.22% currently having been 3.66% at the start of the year, it really doesn't take much to be staring down those end-2025 forecasts for the u/e rate within a couple months.
  • The median dot sees 50bp of cuts for the two meetings left this year and then 100bp of cuts through 2025 to a 3.25-3.5% range as part of this forecast.
  • The market remains more dovish than the Fed with Dec’25 Fed Funds futures implying an effective rate of circa 2.85%, i.e. approximately 50bp of cuts more than the Fed and so is already factoring in some additional labor weakness.
  • Nevertheless, expect particular sensitivity to any adverse labor market surprises, which quickly brings us to today’s jobless claims data and with the initial print covering the payrolls reference period for the September report.  
  • Steady jobless claims data helped partly drive the market stabilization towards expecting a 25bp cut for yesterday’s meeting (prior to blackout steers given to the WSJ/FT). When asked about rising layoffs yesterday, Powell said: “As you know, we're not seeing rising claims. We're not seeing rising layoffs and we're not hearing that from companies. That is something that's getting ready to happen. So we're not waiting for that. There is thinking that the time to support the labor market is when it is strong and not when we begin to see layoffs”.