A sharp slowing in the U.S. labor market complicates the Federal Reserve’s path forward when the central bank makes its next decision on interest rates next month.
CNN reported that U.S. companies have sharply slowed their hiring this year because of hesitancy to invest without knowing the full effects of President Donald Trump’s economic policies.
In June and August, the economy lost jobs and the Labor Department reported that average pace of job gains for the three months ending in September was around 62,000. One key driver of economic output, worker productivity, remains high and gross domestic product has stayed strong.
CNN said it is a dichotomy that presents a conundrum for policymakers at the Fed because it complicates their efforts to figure out if the economy needs cooling or boosting.
“The divergence between solid economic growth and weak job creation created a particularly challenging environment for policy decisions,” Fed officials said at their October meeting.
This past week’s release of the long-delayed September jobs report complicates the Fed’s path when the central bank next decides on interest rates in December, Wall Street economists said. The Federal Open Market Committee (FOMC) is scheduled to issue its next policy decision on Dec. 10.
“Hold or cut, there will likely be multiple dissents,” Michael Feroli, Chief U.S. Economist at JPMorgan, wrote in a research note. “We see it as a very close call, closer even than September of last year. Whereas previously we looked for a cut next month, we are now inclined to see the Committee skip next month, but with cuts still coming in January and May before going on hold.”
Growing Economy Has Not Boosted Hiring
The September employment report revealed the U.S. economy added 119,000 jobs that month, beating economists’ estimates of 51,000, Bloomberg data stated. However, payroll data from the summer months was revised downward, and the unemployment rate ticked up from August.
CNN reported that a growing economy, bolstered by resilient consumers and huge investments in AI, should be boosting hiring, especially now that the Federal Reserve has started lowering borrowing costs.
That hasn’t happened, and some experts fear it won’t, CNN reported.
“When it comes to monetary policy, the narrative next year is going to be about how to handle a jobless expansion,” Ryan Sweet, Chief U.S. economist at Oxford Economics, told CNN. “How do you try to get businesses to hire more?”
CNN said that a recent string of record highs in the stock market suggests that many U.S. businesses are optimistic about AI’s value, but that confidence so far hasn’t translated into an expanding workforce.
Comments made Friday by Federal Reserve Bank of New York President John Williams suggested a rate cut was on the table in the near term. He said that risks to employment have increased while those to inflation have faded.
“I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions,” Williams said in a speech in Santiago, Chile. “Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals.”
The Federal Reserve has a dual mandate to achieve full employment and price stability.
Business spending on information processing equipment and software accounted for 4.4% of GDP in the second quarter, according to Commerce Department data. That’s slightly below a peak reached in 2000 when businesses ramped up similar investments during the dot-com boom. Solid consumer spending this year has also kept company profits afloat.
“Firms are investing a lot in this new technology, but sometimes that means reducing other expenditures, such as hiring,” said Eugenio Alemán, Chief Economist at Raymond James.
Alemán noted that strong AI investment likely persisted in the third quarter and should peak sometime next year.
The government shutdown likely put a dent in GDP in the current quarter from October through December, but the U.S. economy is widely expected to recoup most of those losses early next year.
The U.S. labor market has been stymied by Trump’s significant policy changes since the beginning of the year, CNN said.
“It’s been a challenging year for employment precisely because of the changes in trade and immigration policy affecting both labor supply and demand,” said James Ragan, Director of Wealth Management Research at DA Davidson.
Federal Reserve officials are expected to deliver a few more rate cuts through 2026, according to their latest economic projections from September, CNN said.
The post Jobs Report, Slowing Labor Market Complicate Fed’s December Rate Decision first appeared on The MortgagePoint.
