Labor growth rebounds, Fed rate cut remains likely

Andrew Harrer/Bloomberg

The labor market resumed its solid pace of growth in November, providing evidence that the U.S. economy remains strong, although a rate cut from the Federal Reserve this month remains likely.

The Bureau of Labor Statistics estimates that employers added 227,000 workers last month, slightly exceeding the 214,000 hires projected by Dow Jones. The unemployment rate fell from 4.1% to 4.2%, in line with expectations.

Market forecasters anticipated a large uptick in job growth in November after hurricanes and labor strikes restrained hiring in October, developments that Fed officials have said made it difficult to get a clear signal about the state of the labor market. 

Monetary policy

Fed's Waller leaning toward rate cut but open to a 'skip'

December 2, 2024 3:27 PM

Job additions for the previous months were revised higher, with September nonfarm payroll enrollment up 32,000 and October up 24,000.

Based on commentary from Fed officials this week, a quarter-point rate cut remains the likely outcome from the Federal Open Market Committee meeting on Dec. 17-18, barring an unexpected surge in inflation readings in next week's Consumer Price Index and Producer Price Index reports.

On Monday, Fed Gov. Christopher Waller said he was "leaning" toward supporting a cut despite the fact that recent annualized inflation readings have not been showing the same downward trend in price growth.

"Although monthly core inflation has flattened out in recent months, there is no indication that the pace of price increases for key service categories such as housing and nonmarket services should remain at their current levels or increase," Waller said. "Another factor that supports a further rate cut is that the labor market appears to finally be in balance, and we should aim to keep it that way."

Federal Reserve Bank of New York President John Williams, the vice chair of the FOMC, also sees the labor market as being broadly balanced but still vulnerable to deterioration. In a speech this week, he said that while headline hiring figures have been robust, underlying data about quit rates, vacancies and worker availability all indicate that the labor market is much softer than it was when inflation was at its peak. 

Williams said he believes the Fed's monetary policy remains restrictive and acknowledged that there are risks in being too restrictive for too long.

"Importantly, our mandate is to achieve maximum employment and price stability. That means having demand in line with supply and keeping the risks to achieving our goals in balance," he said. "And now that we've achieved that balance, our job now is to ensure the risks remain in balance."

In other speeches, Fed Gov. Adriana Kugler and Federal Reserve Bank of San Francisco President Mary Daly — a voting member on the FOMC — also supported further reductions to the Fed benchmark federal funds rate but did not comment specifically on timing. 

The employment situation has played a larger role in the Fed's monetary decision making in recent months. The FOMC cut interest rates by half a percentage point in September and another quarter percentage point last month, both times with an eye toward safeguarding the labor force. 

For banks, the implications of further interest-rate reductions remain mixed. On one hand, lower rates could spur more discretionary borrowing and credit usage. It would also alleviate unrealized bond losses on bank balance sheets. For larger banks, lower interest rates create more opportunities in capital markets and for facilitating mergers and acquisitions.

On the other hand, lower rates typically cut into bank profitability by shrinking the net interest margins — the difference between rates they pay on deposits and the rates they collect from borrowers. With many banks still having to pay higher deposit rates to compete for customers, the development could be costly.

But, while the Fed intends to lower interest rates several more times during the coming year, a rate cut this month is not set in stone.

The overall strength of the economy has been a surprise to Fed officials. Some analysts and market participants say continued high levels of spending should caution against cutting rates too quickly and risking a resurgence of inflation. 

In a public speaking engagement on Wednesday, Fed Chair Jerome Powell said FOMC members expected somewhat softer economic growth in September, when they began cutting rates. He added that the Fed has flexibility to respond to data as it sees fit.

"We're not quite there on inflation, but we're making progress," Powell said. "We can afford to be a little more cautious."