On one hand we see an increase in new jobs, on the other hand unemployment is rising, at the same time that unemployment claims are falling, while Donald Trump is threatening layoffs if interest rates don’t come down. And if all of this sounds like it makes no sense, you’re not alone. Wall Street thinks the same.
MIXED PICTURE
Let’s start with the basics. The latest jobs report shows that nonfarm payrolls, meaning new jobs excluding the agricultural sector, increased by 119,000 in September, more than double the forecast of 50,000.
This is a meaningful rebound when you consider that in August jobs had grown by only 4,000. In fact, the previous two months were revised down by a combined 33,000 jobs.
At the same time though, the unemployment rate rose to 4.4 percent from 4.3 percent in August. A small increase, yes, but the highest reading since October 2021.
Behind that rise is something important: the number of people looking for work but unable to find it increased.
So we have the following picture: more jobs are being created, but more people are also looking for work. If this sounds confusing, wait…
Because in the same week, new unemployment claims dropped by 8,000 to 220,000.
In other words, fewer people are filing for unemployment.
And continuing claims, meaning those who remain unemployed, ticked up slightly to 1.97 million, the highest level since November 2021.
THE FED’S DILEMMA
This is where a strange landscape begins to form for the Fed.
On one hand, rising unemployment is usually a factor that leans toward rate cuts. When unemployment goes up, the Fed has more room to give the economy some breathing space.
On the other hand, the rise in job creation and the decline in new unemployment claims are signs of a healthy labor market, which usually lead to maintaining or even raising interest rates. Because in a strong labor market, monetary policy doesn’t need to provide extra support.
And this is where the confusion begins. Which signal matters more? What should we make of these conflicting indicators?
It’s not just us saying it. The Fed itself is saying it.
In the minutes from the Fed’s latest meeting, officials appeared split:
• Many wanted rate cuts
• Some were neutral and could support either option
• And several were firmly opposed to further cuts
The main point of friction is inflation. Some see it moving close to the two percent target. Others believe it remains dangerously high and shows no clear trend of returning to target.
At the same time, they’re worried about the possibility of stagflation, meaning low growth, a soft labor market, and high inflation. A dangerous combination that limits the Fed’s tools and increases uncertainty.
And all of this is happening while the next Fed meeting is approaching without a new jobs report available, since the next one will be released after the meeting. In short, the Fed will have to decide almost blindly.
TRUMP’S THREATS
And as if all this weren’t enough, Donald Trump comes along to add fuel to the fire.
In a recent public comment, he “joked” that he would fire the Treasury Secretary if he doesn’t make sure interest rates come down. And regarding Jerome Powell? He openly says he wants to replace him as soon as his term ends.
Essentially, he’s openly pressuring the Fed for immediate and aggressive rate cuts.
Even though the Fed is supposed to operate independently from the government, the markets listen. And just like that, the odds of a rate cut rose to 39.6 percent from 30.1 percent the day before, according to the FedWatch tool.
And Last Night the odds completely changed again.
