Jobs Report Supports Inflationary Pressures Despite Fed’s Dovish Moves

The latest Employment Situation Report released on October 4, 2024, showed nonfarm payrolls increasing by 254,000 in September, with the unemployment rate holding steady at 4.1%. Wages rose by 0.4% month-over-month, translating to an annualized growth rate of 4.9%. Job gains were seen across industries such as healthcare, construction, and food services, while wage growth continued at a steady pace. This report confirms that the labor appears somewhat resilient.

However, none of this comes as a surprise. It is not typical to see a decline in employment before corporate profitability starts to falter, and the fact is, corporate profits are rising. As we’ve previously discussed, inflation is likely to stay above trend for some time, as consumers are largely insulated from tighter monetary policy and the government continues to run large pro-cyclical deficits. With high cash balances and most consumer debt tied to low, fixed-rate mortgages, households have not felt the full impact of higher interest rates. In fact, it’s important to note that monetary policy hasn’t really been as “tight” as some might think, precisely because consumers remain insulated.

Inflation to Remain Stubbornly High

The latest jobs report only reinforces our view that inflation will persist above market expectations. The September wage growth of 0.4% month-over-month, annualizing to 4.91%, is further proof that inflationary pressures are not going away. With wages increasing, it’s likely that inflation will continue its climb, particularly in an economy where consumer demand remains strong.

Another key development is the Federal Reserve’s recent decision to cut interest rates by 0.5%, despite inflation still hovering above trend. The Fed’s decision to lower the federal funds rate to 4.75%-5% signals a more dovish stance, suggesting that they are more concerned about supporting the labor market and economic growth than curbing inflation. This move is likely to fuel additional inflationary pressures as borrowing costs fall and liquidity increases.