Investors are not confident about a rate cut in December: the latest US nonfarm payrolls have been too contradictory to provide the Federal Reserve with a comfortable reason for another step towards monetary easing.
The employment report for September was the first after a statistical pause caused by the shutdown, and it presented a familiar picture from recent months: strong employment growth, but weak fundamental indicators. The economy added 119,000 jobs — more than double the forecast — yet the jobless rate rose to 4.4%, the highest level since 2021.
Such mixed data has kept traders from making aggressive bets on a December rate cut. Some optimism only emerged after comments from New York Federal Reserve President John Williams, who acknowledged the possibility of further adjusting the funds rate. His words added softness to the market but did not change the overall picture: the room for maneuver remains limited.
According to Bank of America, the labor market will determine the fate of any further policy easing. So far, it does not appear weak enough to convince Jerome Powell to continue the cycle. Economist Shruti Mishra notes that the employment weakness seen this year largely reflects imbalances in supply and demand rather than a reversal of the economic cycle. Unemployment is rising but remains historically low.
A key factor ahead is the sharp reduction in labor supply resulting from tougher immigration policies. BofA estimates that net immigration in 2025 will drop to 380,000, while the average over recent years exceeded two million. For the labor market, this means an equivalent minus of approximately 90,000 potential workers each month.
Under these conditions, the breakeven level for job growth — that is, the necessary increase in jobs to maintain stable unemployment — will drop to around 20,000 per month. This will allow the labor market to remain close to full employment even with a moderate slowdown in hiring.
BofA anticipates a mild rise in unemployment, peaking at around 4.5% early next year. Experts believe that the labor market will remain too resilient for the Federal Reserve to justify further rate cuts. Given the ongoing inflationary pressure, the bank concludes that the rate-cutting cycle is likely already over during Powell’s term at the helm.
