Fed seen sticking to December rate hike after jobs data
- US employers added 165,000 jobs last month, more than twice what economists had expected
A stronger-than-expected October jobs report bolsters the case for further Federal Reserve interest-rate hikes that had lost some of its moxie amid the post-election swoon in US stocks and a mounting sense that AI-driven demand could screech to a halt.
US employers added 165,000 jobs last month, more than twice what economists had expected, Bureau of Labor Statistics data showed on Friday, and the unemployment rate ticked down to 4.1%. Fed Chairman Kevin Warsh last month said that policymakers would be watching for “the accumulation of data” to help decide if more monetary policy tightening would be needed, and the latest labor market report provided a definitive tick in the “yes” column.
“This is a very strong labor-market report on the heels of solid GDP and consumer-spending data last week, reinforcing the economy’s positive momentum,” wrote Fitch Ratings’ analyst Olu Sonola after the report. Recent concern over AI poses a risk to that outlook, Sonola said, “but for now the economy remains on firm footing. The labor market’s resilience keeps the Fed focused on inflation and pushes the policy debate further toward a December rate hike.”
Gold muted as Fed policy tightening prospects weigh
In comments at a St. Louis civic event on Friday, St. Louis Fed President Alberto Musalem said that in conversations with businesses in his Midwestern district inflation remained the top concern.
“Inflation is a regressive tax, a distortionary tax,” said Musalem, who has advocated further rate increases. “The best thing we can do for growth and employment is bring inflation back down on a timely basis.”
He did not address the recent swoon in stock markets driven lower by new doubts about the pace and sustainability of the AI boom, but said that for now he feels the emerging industry is feeding higher inflation through demand for commodities like copper and other resources.
Even if that pays off in future profit and productivity, “we need to make monetary policy for the economy of the day, not what it may be five years from now,” Musalem said, and on that basis, for now at least, AI investment “will continue to contribute to inflation.”
His comments follow Tuesday’s election, when wins by a clutch of Democratic governors and a hefty Democratic majority in Congress raised fears of a clampdown on AI data center projects. The Nasdaq Composite Index fell by the most in 19 months on Thursday as the extent of the political shift sank in. Several of the new governors ran on promises to rein in data center construction, and Democratic congressional leaders are planning a raft of new AI legislation.
The jitters over AI also prompted traders to back away from what had been big bets on a Fed December rate hike, figuring that a slowdown in AI-related demand could cool economic growth and ease inflationary pressures, making further monetary policy tightening a less-urgent matter.
Friday’s employment report, however, put a Fed rate-hike back in focus. Markets were pricing about a 78% chance of a quarter-point policy rate increase at the Fed’s December 8-9 meeting, down from 85% shortly after the jobs data were released and up from about 67% on Thursday. Traders now also see an earlier next-and-final interest-rate increase, in April instead of June, as the Fed battles inflation that has been running above the Fed’s 2% target for more than five years.
“For the Federal Reserve, this should allow them to concentrate on the inflation side of their mandate,” wrote Raymond James analysts. “We expect the Fed to increase the federal funds rate by 25 basis points in December.”