Mixed Jobs Report Cools Rate Cut Enthusiasm, Despite Powell's Door Remaining Slightly Ajar

The September employment figures painted a puzzling picture for policymakers and traders alike. While the headline number captured attention—119,000 nonfarm payrolls added versus expectations of just 50,000—the devil lurked in the details. The unemployment rate simultaneously ticked up to 4.4% from 4.3%, marking the highest reading since October 2021. This disconnect left markets with a familiar dilemma: growth versus slack.

The immediate market translation was clear: probability of a December rate cut tumbled to historically low levels. Yet a Friday remarks from New York Fed President John Williams provided a modest counterbalance, as he suggested room existed for “further adjustment in the near term” to normalize monetary policy. The dovish commentary didn’t dramatically shift expectations, but it signaled the central bank hadn’t entirely closed the policy adjustment window.

Where the Labor Market Heads Matters Most

Bank of America’s analysis points to structural shifts reshaping the employment landscape. Economist Shruti Mishra emphasizes that current softness stems from simultaneous pressures on both labor supply and labor demand sides. More significantly, she forecasts a substantial contraction in workforce availability over the coming year.

The culprit: stricter immigration enforcement. BofA estimates net immigration will plummet to approximately 380,000 annually over the next 12 months, a sharp reversal from the 2020-2023 average of 2.1 million per year. This translates into a monthly labor supply shortfall of roughly 90,000 workers compared to recent trends—a consequential structural change.

The Breakeven Recalculation

This supply-side shock fundamentally alters the “neutral” employment level. Instead of requiring monthly job gains of 150,000-200,000 to maintain stable unemployment, Mishra’s framework suggests the breakeven rate could compress to approximately 20,000 jobs per month. With fewer workers entering the labor force, employers need fewer additions to prevent rising unemployment.

Bank of America projects the unemployment rate will modestly climb to around 4.5% in early 2025, but crucially, remains near full employment by historical standards. This middle ground creates a policy bind: the labor market shows neither the strength to justify rate hikes nor the weakness to sustain aggressive cuts.

Why Powell Likely Stays Put

The bank’s conclusion carries weight with rate markets: the Federal Reserve faces “limited scope for further rate cuts” while Powell chairs the institution. Persistent inflation, combined with a labor market that refuses to crack significantly, leaves little room for additional policy easing. The market is pricing this reality into current expectations, with December now appearing a near-certainty for pause rather than action.