Upbeat September Jobs Report Signals Fed May Need to Reassess Rate Cuts

Investing.com — The upbeat September jobs report and significant upward revisions to GDP and GDI suggest that the Federal Reserve’s 50 basis point (bp) rate cut in September was “not warranted,” according to Bank of America (BofA) strategists.

BofA reported that discussions with clients have quickly transitioned from whether the Fed would cut by 25bp or 50bp in November to questions about the necessity of any rate cut at all. Some even speculate that the Fed might forgo a November cut to balance the larger-than-expected September cut.

However, the bank’s strategists believe that even if the Fed later views the September cut as excessive, it is unlikely to refrain from cutting by 25bp in November, especially in light of robust labor data.

> “Governor Waller said as much in his most recent comments. As long as the Fed feels comfortable that broad-based disinflation is on track, it can keep cutting rates back to neutral,” strategists stated in a Tuesday note.

While the labor market has overshadowed inflation concerns recently, attention is shifting back to the Consumer Price Index (CPI) ahead of Thursday’s data release. BofA expects a core CPI reading of 0.3% month-on-month, which is above consensus, but believes that the core Personal Consumption Expenditures (PCE) will come in at a milder 0.2%.

They note that this should be soft enough for the Fed to move forward with a 25bp cut in November, as the year-over-year rate “would drop due to favorable base effects.” Chair Powell has also gained flexibility by “de-emphasizing the stickiness in housing inflation,” according to strategists.

In recent weeks, economist and former PIMCO CEO Mohamed El-Erian’s term “data point dependence” has highlighted the market’s increased sensitivity to macroeconomic data releases.

BofA strategists concur, stating that although it is natural for the Fed to be data-dependent, not all data surprises carry the same importance. Still, the Fed's focus on avoiding falling behind the curve has led markets to react to data surprises as if they are all significant. This trend is unlikely to change anytime soon,” strategists remarked.