MNI: Job Boom Means Slower Fed Cuts, Pause Possible - Ex-Staff

A strong rebound in U.S. employment suggests the Federal Reserve can cut interest rates more gradually after an aggressive start to the easing cycle and could even lead to a pause in rate reductions if it proves persistent, former Fed staffers told MNI.

Labor Department data Friday showed a 254,000 jump in U.S. payrolls gains in September and a drop in the jobless rate to 4.1%, surprising investors and boosting the benchmark 10-year Treasury yield to above 4%. Fed officials said in September they plan to lower interest rates faster in part because they expect unemployment to rise steadily to 4.4% by year-end.

“They will deliver 25 basis points in November and December. I think it’s right that the market is pricing out the probability of a 50 basis point move,” Matthew Raskin, a former New York Fed economist, said in an interview.

“You could even see a pause as early as December if you got another strong employment report, maybe inflation data comes in a little bit on the stronger side. A pause coming in early 2025 is definitely plausible,” said Raskin, now at Deutsche Bank.

Ex-Philadelphia Fed economist Dean Cruoshore agreed, saying the Fed’s 50 basis point cut in September was “a small mistake, attributable to looking for data to support it that were not really there. The labor market is and was strong, and inflation remains stubbornly high.”

“If the data continue to be strong like this, the Fed may not cut again this year. I suspect a few data points will come in weak from time to time, and I would not be surprised to see a couple of 25 bp cuts,” said Cruoshore, a University of Richmond professor.

Cruoshore cited strong fiscal support and a wealth effect from high asset prices as contributing to a strong economy, which registered 3% growth in the second quarter.

GRADUAL PACE

That rate of growth is likely to continue into next year, said former Dallas Fed economist Joseph Haslag, who expects the economy to expand between 2.5%-3% in 2025.

The former staffers generally agree that strength in the job market and the economy – an achievement of the vaunted soft landing – calls for a gradual approach to monetary easing. (See MNI INTERVIEW: Fed Can Cut Gradually If Jobs Stay Strong-Kohn)

“There’s probably two 25 basis point cuts this year. They’re going to be metered, they don’t want to lose the inflation fight,” said Haslag, a professor at the University of Missouri.

“I’d be shocked if it was more aggressive. Looking at market forces we still thought we were at a pretty restrictive stance and we’re going to be gradual from here on down."

Philadelphia Fed President Patrick Harker told MNI in August that he wanted to see the central bank enact “methodical” interest rate cuts. (See MNI INTERVIEW: Fed's Harker Ready To Start 'Methodical Cuts)

Another reason for Fed officials to take things slow is the possibility that inflation risks have not completely receded just yet, Raskin said.

“I don't really worry so much about a reacceleration in inflation, but the prospect that it could just level off at a level that is uncomfortably high for the Fed, I do think is a nontrivial risk,” he said.

“So if we just stabilize around current levels, 2.5% or something like that, it may be a scenario where the Fed doesn't need to come back and hike again, but they're cutting much more gradually, punctuated by extended pauses.”