Recently, many people are entangled in U.S. employment data and Federal Reserve policies. One moment they say September's non-farm payrolls exceeded expectations, and the next they fear the Federal Reserve will suddenly adopt a hawkish stance. To put it simply, they haven't grasped the core logic—does the Federal Reserve really get distracted by a single month's data?
Let's first discuss the point that confuses everyone: September's non-farm payrolls increased by 119,000, which looks pretty impressive. So why did the Federal Reserve's Williams say the labor market is cooling? The answer is quite simple; this data is fundamentally inflated. First, this data is two months late and coincides with the U.S. government shutdown, which inherently diminishes its reference value. Additionally, most of the new jobs are temporary or government-assisted positions, while full-time positions have actually been shrinking. More critically, the unemployment rate has quietly risen to 4.4%, hitting a new high since 2021. The trend in the years following the pandemic is quite clear: non-farm employment is overall shrinking, the unemployment rate is gradually rising, and a single month's rebound is like a temporary fever during a cold; it doesn't change the fact that the body is deteriorating.
Now let's talk about inflation, the roadblock. Many people believe that the CPI is still around 2.7%, and the core CPI is even 3.3%. Will the Fed turn hawkish because inflation hasn't been brought down to 2%? In fact, this is over-worrying. The CPI annual rate is compared to last year; the current 2.7% may not seem low, but it has already dropped significantly from the highs of the past two years. Moreover, November data shows that key items like housing costs and core services are cooling down, and the upward pressure on inflation is decreasing. More importantly, the U.S. economy can no longer withstand rate hikes or sustained high rates—November's government shutdown set a record, and Moody's analysis suggests this could reduce Q4 GDP growth by 1-2 percentage points. Companies are starting to delay hiring and even lay off employees; if we don't inject liquidity, the economy is really going to face major problems.
So the Fed's current strategy is particularly clear: it is to cut interest rates intermittently, taking one step at a time. Last year's Q4 saw three rate cuts, this year has paused to observe, and when economic pressure arises in Q4, it will naturally restart rate cuts. The market is betting that the probability of a rate cut in December is close to 90%, and large institutions like Goldman Sachs have also stated that unless inflation suddenly surges, a rate cut is basically a done deal. Even if the October data is incomplete, the dismal economic situation in November provides ample reason for a rate cut: government shutdown, fluctuations in the U.S. stock market, and declining job quality are all apparent.
As for the probability of a hawkish stance? I think it is almost zero. The Fed is currently in a dilemma but must choose a side; although inflation has not reached the target, the downside risks to the economy and employment are more urgent. The most likely scenario is a 25 basis point rate cut in December, followed by a pause to observe in the first quarter of next year, waiting for inflation to further decline and economic data to clarify before continuing to cut rates. After all, inflation is expected to drop to about 2.4% in 2025, leaving plenty of room for rate cuts.
In summary: don't be deceived by the false prosperity of a single month. The foundation of the U.S. economy is already weak. What the Fed should do now is to cut rates in line with the trend to support the economy; there is neither need nor confidence in a hawkish stance. The December meeting is likely to give the market a sense of reassurance, and we can wait to see the results.