‘Stale’ September jobs data is mixed news for a divided Fed

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By Ann Saphir and Howard Schneider

(Reuters) -The U.S. economy added more jobs than expected in September, but a rise in the unemployment rate and downward revisions to prior months still presented an ambiguous picture for Federal Reserve officials mulling whether further interest rate cuts are needed to bolster the labor market.

Following the release of the data on Thursday by the Bureau of Labor Statistics, traders modestly boosted the odds of a quarter-percentage-point rate cut when the Fed holds its next policy meeting on December 9-10, to 33% from about 20%.

Cleveland Fed President Beth Hammack, however, said the “stale” September data largely affirmed what policymakers expected – a job market that is slowing, but doesn’t seem headed for a faster deterioration.

In an interview with CNBC, Hammack said she “anticipated some further cooling and it appears that is what we are seeing,” with the gain of 119,000 jobs in September beating economists’ expectations, and the unemployment rate rising on a rounded basis from 4.3% to 4.4%, the highest level in nearly four years.

Even that higher jobless rate contained some positive news, reflecting an additional 470,000 workers in the labor market.

Wages rose 3.8% on a year-over-year basis.

Rick Rieder, the chief investment officer of global fixed income at BlackRock and one of five people on the short list of possible candidates to replace Fed Chair Jerome Powell next year, said the report showed underlying job growth remained weak, and “leads to what we believe is a need for the Federal Reserve to continue reducing interest rates consistent with its full employment mandate,” while adding it remained uncertain whether the central bank would make such a move next month. 

The September jobs report, the most significant so far in a series of catch-up data releases following the end of the recent U.S. government shutdown, means the Fed can keep its eye on inflation and “maintain a somewhat restrictive stance of policy … Right now monetary policy is barely restrictive and we need to maintain that” to ensure inflation returns to the central bank’s 2% target, Hammack said.

Since the U.S. central bank cut rates in October, many Fed officials have signaled wariness about further reductions in borrowing costs this year with inflation still above the 2% target. Without stronger evidence the labor market is in need of urgent support, the more cautious members of the rate-setting Federal Open Market Committee may win the day next month, some analysts said.

“In the face of so much FOMC hawkishness and without any further jobs reports ahead of the December FOMC meeting, today’s jobs release is unlikely to tip the balance to a December cut,” Seema Shah, chief global strategist at Principal Asset Management, wrote in a note.

FISCAL STIMULUS IN 2026 COULD AFFECT RATE-CUT OUTLOOK

Some analysts, however, are already pointing to expectations that the U.S. economy may strengthen next year as individual tax breaks, accelerated depreciation allowances, and other recent changes in federal law passed by the Republican-controlled Congress kick in, an outlook that could add further weight to arguments against cutting rates too much further.

Policymakers will issue their own updated projections for the economy and monetary policy at the Fed’s December meeting.

The minutes of the October 28-29 meeting, released on Wednesday, showed Fed staff had upgraded their outlook for next year, “reflecting stronger expected potential output growth and greater projected support from financial conditions.” That outlook also said the “unemployment rate was expected to decline gradually after this year before flattening out at a level slightly below the staff’s estimate of the natural rate of unemployment,” the minutes showed.

Unemployment below the “natural rate” is considered inflationary, though estimates of it are considered imprecise.

John Roberts, a former deputy associate director of the Fed’s research division and now a special advisor to Evercore ISI, said in a new analysis that the tax and other changes from what is known as the “One Big Beautiful Act” would lift economic growth by about four-tenths of a percentage point in early 2026, enough to push down the unemployment rate and likely dissuade the Fed from at least one rate cut that it would otherwise have made.

(Reporting by Ann Saphir and Howard Schneider; Editing by Susan Fenton and Paul Simao)