Fed May Hold Rate Cuts as September Job Gains Slow, Wage Growth Stays Moderate

September Jobs Report Expected to Show Continued Cooling

The September Non-Farm Payroll (NFP) report, due this Friday, is expected to reflect a labor market that continues to cool but remains stable. Analysts anticipate a moderate increase of around 150,000 jobs, up slightly from 142,000 in August, alongside a steady unemployment rate of 4.2%. This slowdown in hiring is seen as a positive sign for Federal Reserve policymakers aiming to guide the economy to a soft landing without aggressive intervention.

Cooling Labor Market Aligns with Fed Goals

September’s job growth forecast aligns with the Fed’s objective of curbing inflation while avoiding a significant rise in unemployment. If hiring comes in as projected, it will signal a continued easing in labor market conditions, particularly after months of strong gains. Wage growth, a critical driver of inflation, is expected to post a modest 0.3% monthly increase, translating to a 3.8% year-over-year rise—similar to August’s figures.

Economists believe this cooling labor market, combined with steady wage growth, could give the Fed more flexibility to gradually lower interest rates. “The balance of power has shifted back to employers, which will alleviate wage pressure,” said Katie Nixon, CIO at Northern Trust Wealth Management.

Potential Surprises and the Fed’s Response

While consensus forecasts point to moderate job gains, a stronger-than-expected report could complicate the Fed’s efforts. Some analysts, like JPMorgan’s David Kelly, caution against reading too much into a single month’s figures, as NFP data can often swing unexpectedly due to revisions. If job growth comes in significantly higher than expected, the Fed might be forced to rethink its pace of interest rate cuts.

There is also the possibility of downside risks. The impact of strikes and natural disasters, such as the Hurricane Helene and the Boeing machinist strike, could weigh on the job numbers, particularly as these disruptions could lead to further volatility in the coming months. Economists are viewing the September report as the last “clean” data point ahead of the distortions expected in October’s NFP report.

Wage Growth Remains in Focus

Wages have been another area of concern for inflation hawks, and the September report is likely to reinforce expectations that pay increases are moderating. If wages continue to grow at a slower pace, it could support the view that inflationary pressures are diminishing. However, wage inflation remains a critical issue, as any unexpected acceleration could force the Fed to adopt a more hawkish stance on monetary policy.

Market Forecast: Neutral to Bearish Outlook

Traders are likely to see a neutral to bearish outlook in response to the jobs report, given the expected cooling of the labor market. If job gains are in line with forecasts and wage growth remains stable, this could provide reassurance that the economy is cooling at a controlled pace. However, any significant deviations—particularly stronger job numbers or wages—could trigger a more bearish market reaction as traders anticipate a longer period of Fed tightening.

As the market awaits the Fed’s next move, the September report is likely to reinforce the view that a soft landing remains achievable, though the path ahead remains uncertain.