Fed Nearing Soft Landing as September Jobs Report Surpasses Expectations

The unexpected payroll increase lifts the shadow of a looming economic downturn and virtually eliminates any possibility of the Fed enacting another 0.5 percentage point rate cut soon. The Federal Reserve’s next meeting, scheduled for November 6-7, will come after the U.S. presidential election, allowing policymakers additional time to evaluate economic conditions.

Soft Landing in Sight

The robust jobs data provides the Fed with more confidence in achieving the elusive soft landing, where inflation is brought under control without severely impacting economic growth. According to Beth Ann Bovino, chief economist at U.S. Bank, the latest data reinforces the likelihood of this outcome.

"We’ve been expecting a soft landing. This just gives us more confidence that it seems to remain in place," Bovino said, adding that the economy may perform even stronger in 2025.

Prior to this report, economists and markets had braced for continued deceleration in employment growth, with payroll estimates hovering around 150,000. Instead, September saw significant growth across sectors, helping to reverse a downward trend in hiring that began in April. As a result, financial markets have adjusted their rate cut expectations.

Changing Fed Expectations

The strong labor data has shifted market expectations for the Federal Reserve's rate cuts. Before the report, markets had priced in a 50-basis point cut for December, followed by smaller reductions throughout 2025. Now, however, the focus has turned to smaller, more gradual cuts. Futures markets indicate that a 25-basis point cut is more likely in November, with a similar move expected in December.

This adjustment reflects a growing sentiment that the Fed can now afford to take a more measured approach to monetary easing, particularly as inflation shows signs of steadying. Bovino noted that this could slow the pace of rate cuts throughout 2025, keeping the economy on solid footing.

"If we continue to see a stronger-than-expected economy, that may give the Fed reasons to slow the pace of rate cuts through 2025 with that exit rate being a little bit higher than they currently expect," Bovino added.

Economic Blemishes

While the jobs report was largely positive, it wasn’t without caveats. More than 60% of the September payroll growth came from sectors that have benefited from government fiscal support, such as food services, healthcare, and government jobs. There were also technical concerns regarding low response rates from survey participants, which could lead to revisions in future months.

Still, the strength of the overall report has raised questions about whether the Fed's earlier decision to cut rates by 50 basis points in September was premature. Bank of America economists questioned whether the Fed acted too quickly, speculating that a more cautious 25-point cut might have been more appropriate.

Questions for the Fed

With this new data, the Fed faces a dilemma as it prepares for its November meeting. Experts, such as Kathy Jones, chief fixed income strategist at Charles Schwab, noted that the Fed must now reconsider its approach in light of the stronger-than-expected jobs market.

Jones explained that the Fed could face pressure to reconsider its neutral interest rate—the rate that neither stimulates nor restricts economic growth. “The question becomes, how does everybody keep getting it wrong?” Jones remarked, referring to the frequent miscalculations about the economy's strength. "Do they pause? Do they do another 25 basis points? They have a lot of figuring out to do."

A Stable Economy

Despite the uncertainties, Fed officials are likely content with the current state of the economy. The labor market, once feared to be in decline, appears to be on solid ground. Additionally, consumer sentiment, while fluctuating, doesn’t reflect a crisis, and the overall economic picture remains positive.

“We’ve witnessed a pretty remarkable economy over the past few years, despite some naysayers and lackluster consumer sentiment,” said Elizabeth Renter, senior economist at NerdWallet. She also noted the importance of considering political passions during an election year, which can lead to overreactions to economic reports.

"But the economic aggregates tell us the U.S. economy has been and is strong," Renter concluded.

With inflation moderating and employment holding firm, the Federal Reserve appears to be on the brink of achieving what has often been elusive in economic policy—a soft landing. The November meeting will provide further clarity on just how smoothly the economy can transition into 2025.