Source: Barron Chinese
Author: Nicolas Jasinski

According to data released by the US Bureau of Labor Statistics last Friday (10/4), the number of non-farm payrolls in the US increased by 0.254 million in September, the biggest monthly increase since March. At the same time, the total number of non-farm payrolls increased by 0.072 million in July and August. The data also showed that the US unemployment rate fell for the second month in a row in September to 4.1%.

The better-than-expected employment data provided further support for the view that the US economy could achieve a “soft landing.” David Page (David Page), head of macroeconomic research at AXA Investment Management (AXA Investment Management), said, “There is no feeling that the economy is approaching recession; we have been continuously raising our forecast for GDP growth.”

After fighting inflation for two years, Federal Reserve officials recently focused more attention on keeping the US economy growing. The Federal Reserve Policy Development Committee sharply cut the federal funds rate by 50 basis points in September, beginning a monetary easing cycle, while promising to cut interest rates further.

Prior to the release of non-farm payrolls data in September, billionaire investor Stanley Druckenmiller (Stanley Druckenmiller), the head of the top family office Duquesne Family Office, slammed the Federal Reserve on September 24 for “obsessing over a 'soft landing' and fine-tuning the 'soft landing' to achieve this hypothetical economic effect.” Drucken Miller pointed out that he believes the Federal Reserve should cut interest rates by a small margin at the September meeting, release fewer signals about future interest rate cut plans, and keep the option of suspending interest rate cuts in November and staying on hold.

Drucken Miller said, “There are indeed signs that the economy is slowing down, but I don't think if something isn't broken, don't fix it.”

On the same day Drucken Miller made these remarks, Bill Ackman (Bill Ackman) of Pershing Square Capital Management (Pershing Square Capital Management), a well-known hedge fund manager, expressed the opposite view. He believes that the Federal Reserve should cut interest rates by another 50 basis points in November. Ackman pointed out that the “soft landing” faces several risks, and the US interest rate level is still too high.

“Uncertainty, war, and restrictive monetary policies jeopardize a 'soft land',” Ackman said.

Trends in the US unemployment rate from September 2023 to September 2024

The upward trend in the unemployment rate was reversed after corporate recruitment activity rebounded.

The September non-farm payroll data was not the final basis for the decisions made by the Federal Open Market Committee (FOMC) at the November 6-7 meeting, but these data provided more basis for Drucken Miller's views rather than Ackman's.

In addition to the increase in the number of employed people and the decline in the unemployment rate, another good news in the September employment report was that workers' wages rose 4% year on year. In contrast, economists estimate that the US CPI rose 2.3% year on year in September. The data will be released on October 10.

From November of this year to May next year, the Federal Reserve will hold five meetings. Judging from Friday's trend in the interest rate futures market, the probability that the Fed will cut interest rates by 25 basis points at each meeting is the greatest. The probability of cutting interest rates by 50 basis points again in November this year has dropped to less than 1%.

The premise that the Federal Reserve suspended interest rate cuts at the November meeting was that the September CPI greatly exceeded expectations. The next data to be released is the October non-farm payrolls data released on November 1. A few days later is US presidential election day, and there is less than a week until the next meeting of the Federal Reserve.

Compared to the strong September data, the October non-farm payrolls data may not look very good. The impact of Hurricane Helene may put pressure on the job market, giving people the feeling that the job market is deteriorating again; a protracted port workers' strike seems to have been avoided, yet around 0.033 million Boeing workers are still on strike. It is entirely up to the Federal Reserve officials themselves to decide whether they will refer to these data.

Regardless of the extent of the interest rate cut in November, US interest rates will continue to fall over the next year, even if the US economy shows no new signs of slowing down. This is because for many Federal Reserve officials, the “destination” is more important than the “journey.”

A “destination” is what is known as a “neutral interest rate” — an interest rate that neither stimulates nor limits economic activity. The “neutral interest rate” is a theoretical concept that cannot be measured in real time. However, according to numerous public statements made by Federal Reserve officials in the past week, most officials believe there is a long way to cut interest rates, and the Federal Reserve will have time to figure out the situation.

Many economists' estimates of America's “neutral interest rate” after the COVID-19 pandemic are in the range of 2.7% to 2.9% or 3.1% to 3.3%. According to the economic forecast released by the Federal Reserve in September, the median estimate of the long-term federal funds rate is 2.9%. In contrast, the current federal funds rate target range is 4.75% to 5%.

Chicago Federal Reserve Bank Governor Austin Goolsbee (Austan Goolsbee) said in an interview with Bloomberg TV on Friday after the September employment data was released: “Our final determination of the neutral interest rate largely depends on our opinion on the potential economic growth rate. If productivity continues to grow at the current rate, it does mean that neutral interest rates will be higher, but the US economy can withstand higher neutral interest rates.”

For the market, this would be the closest thing to a “Goldilocks” (Goldilocks) scenario: the economy continues to grow while interest rates fall. Of course, this is not a matter of course; the “three bears” mentioned by Ackman may resurface and ruin the growth story, or Drucken Miller's concerns about a resurgence in 1970s inflation will come true, and the Federal Reserve will have to stop cutting interest rates.

Jim Baird (Jim Baird), Chief Investment Officer at Plante Moran Financial Advisors, asked the question: “Can employment opportunities and employment conditions maintain a steady momentum when the Federal Reserve gradually loosens the brakes (that is, monetary policy relaxation)?” “Judging from the September employment data, there is almost no indication that this will not be possible,” he said.

Editor/jayden