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Nonfarm payrolls for September came in with a slightly lower-than-expected gain of 136,000. While continued job growth is welcome, there has been a downward shift in momentum with payrolls only rising by an average of 161,000 this year versus an average gain of 223,000 during 2018. Another worrisome sign is the Labor Department reporting that average hourly earnings were unchanged for the month and up only 2.9% year over year, despite the actual unemployment rate hitting a 50- year low of 3.5%.
The manufacturing slowdown was also seen in the Institute for Supply Management’s monthly factory index, which slipped to its lowest point in over 10 years as trade frictions spread and slowdowns in Europe and Asia made their effects felt here. The relatively strong dollar is probably also a factor in this equation.
The Federal Reserve (the “Fed”) did not wait to see the actual employment figures before deciding to cut interest rates at its September 18 meeting. Fed officials brought the overnight federal funds rate down by 25 basis points to between 1.75% and 2.00%. The Fed cited a slowing economy and very muted inflation as the main drivers of its dovish move.
The Fed still has two policymaking meetings left this year. It is important to note that the September rate-cut decision was far from unanimous, with one member voting for a 50-basis-point move while two members voted to hold rates unchanged. Fed Chair Jerome Powell has a difficult balancing act as we enter the final quarter of the year. He is committed to using monetary policy to help ensure the continuation of the current expansion yet does not want to jeopardize the Fed’s treasured independence from political pressure by appearing to act in response to Executive-Branch suggestions. Incoming data will continue to be the key to Fed decisions, but with economic headwinds increasing and inflation under control, further easing steps are likely.
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