October 4, 2019 / 1:06 PM / 14 days ago

Fed policymakers, divided on rate cuts, to stay so

(Reuters) - Federal Reserve policymakers, divided over how much more policy support they need to give to a growing U.S. economy, may remain so after fresh data Friday showed the unemployment rate fell last month to a 50-year low but wage growth barely budged.

Traders of interest-rate futures judged the report would keep the Fed on track for at least one more interest-rate cut this year. The central bank has cut rates twice so far in 2019.

But they pared bets the central bank would need to move to full-on crisis-fighting mode, and overall traders no longer saw a fourth rate cut in 2019 to be a likely scenario.

“Investors are on high alert for signs of a recession, (but the jobs report) doesn’t confirm the story,” said Shawn Snyder, head of investment strategy at Citi Personal Wealth Management in New York. “It’s sort of a goldilocks report. It’s not strong enough to move the Federal Reserve away from cutting rates at the end of October but it’s not weak enough to make you concerned about the labor market or the consumer.”

The report showed unemployment fell to 3.5% last month as U.S. employers added 136,000 jobs, down from 168,000 jobs created in August but still plenty to keep up with labor market growth.

Fed policymakers for years had forecast just such a moderation in jobs gains as the labor market reaches full potential, one of the Fed’s two goals.

Some policymakers, perhaps including Philadelphia Fed President Patrick Harker who opposed the Fed’s most recent rate cut, may take this emerging equilibrium in the labor market as more reason for the Fed to stand pat for the rest of the year.

In September, economic projections showed most Fed policymakers expected no further rate cuts this year.

At the same time, though, average hourly earnings were unchanged from the prior month, suggesting little upward lift to inflation that has lagged stubbornly below the Fed’s 2% inflation goal.

That’s sure to disappoint other policymakers, including Minneapolis Fed President Neel Kashkari who has wanted the Fed to make bigger rate cuts in part to aid the pocketbooks of regular Americans. In September, seven of the Fed’s 17 policymakers signaled they thought the Fed would need to ease policy further by the end of the year, even as the median forecast was for no move.

With little that’s policy-decisive to emerge from the final monthly jobs report before the Fed’s next meeting on Oct. 29-30, U.S. central bankers are likely to continue to argue over what is “appropriate” to sustain the expansion and, as Fed Vice Chairman Richard Clarida said late Thursday, take rate-cut decisions one meeting at a time.

“I look at a large number of indicators... I don’t think recession risk is particularly elevated, under appropriate monetary policy,” Clarida said, without saying exactly what appropriate monetary policy might be.

The Trump administration meanwhile kept up its pressure on the Fed to cut interest rate further. White House trade advisor Peter Navarro told CNN Friday the dollar is overvalued and is “killing” U.S. exports, and he called for aggressive Fed policy easing in response. Trade data released Friday showed U.S. exports gained slightly in August.

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis//File Photo

Two other reports this week, one showing a contraction in factory activity and another a slowdown in services sector growth, raised concern that global economic weakening, trade tensions and geopolitical risks are beginning to spread to the broader U.S. economy.

But the jobs report neither ratified nor rejected that thesis.

“It doesn’t mean that the economy and the jobs market are falling off a cliff,” said John Velis, global macro strategist at BNY Mellon in New York. “On the other hand, it’s not strong enough that it’s going to take out this additional Fed easing that has been priced into the curve the last few days.”

Reporting by Ann Saphir; Additional reporting by Gertrude Chavez-Dreyfuss and Lucia Mutikani, Editing Chizu Nomiyama and Andrea Ricci

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