Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / The September Jobs Report And The Fed's Next Move
Transcript
- Lucas: The September jobs report came in at twenty-nine thousand new positions, and the unemployment rate ticked up to four point two percent. It was not a catastrophic miss, but it was certainly not the robust expansion markets had priced in. When you look at the broader context, especially with core PCE inflation holding steady at three percent, the Federal Reserve’s next move feels less like a guess and more like a calculation. Luna: Right, and that forty-two percent figure is sitting right at the edge of what policymakers consider 'full employment' without sparking renewed wage pressures. Are we looking at a slowdown or a structural shift? Lucas: It feels like a mix of both, but the key here is the divergence. Private sector ADP data showed ninety thousand jobs added, which is healthy, yet the headline number is anemic. This tells me the public sector or cyclical sectors are dragging, while the underlying engine of the economy is still turning over. For the Fed, that nuance is everything because they care about the marginal change in demand, not just the total count. Luna: Exactly. If the private sector is still creating jobs at that pace, why is the headline so weak? Is it seasonal adjustment issues or something deeper? Lucas: Seasonal adjustments always play a role, but I think we’re seeing a genuine cooling in hiring demand as businesses digest the higher cost of capital. We are currently operating with the federal funds effective rate at three point seven five percent, and that has been biting into expansion plans. The real question isn't whether the economy is shrinking, but whether the Fed needs to cut rates to prevent a harder landing or if they can hold steady given that core inflation is manageable. Luna: I’ve been thinking about that balance sheet impact too. With liquidity conditions tight, even profitable companies might be pulling back on headcount rather than cutting prices immediately. Lucas: That’s a sharp observation, Luna. And it ties directly into the donation segment we do early on because supporting this show helps us dig into these exact structural nuances. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these deep dives possible. Luna: Yeah, it really does add up when you think about it—no ads, just listener support keeping the analysis ad-free and independent. Lucas: Absolutely. So, getting back to the data: if the Fed holds rates steady at the next FOMC meeting, they are essentially betting that this twenty-nine thousand job growth is sustainable. But if they cut, they are acknowledging that the labor market is weakening faster than the inflation data suggests. Luna: Do you think the Fed is more afraid of cutting too early and letting inflation rebound, or cutting too late and breaking the labor market? Lucas: Historically, they are far more afraid of the former. But by October 2026, the risk profile has shifted. With the ten-year Treasury yield sitting around five point two eight percent, the cost of long-term borrowing is already high. The Fed doesn't need to hike further; they likely need to signal a pivot to stabilize asset prices. The VIX has been relatively calm, but that complacency could vanish if the next jobs report shows a bigger drop. Luna: So you’re saying the market is pricing in stability, but the underlying labor data is starting to crack under the weight of those high rates? Lucas: Precisely. Look at the men’s labor market specifically. Recent headlines highlight that men are losing ground in employment, which is a significant demographic shift. This isn't just about young workers entering the market; it's about prime-age workers in manufacturing and logistics stepping back. That’s a drag on aggregate demand that the Fed cannot ignore. Luna: That’s a crucial detail. If prime-age workers are pulling back, consumption patterns must be changing too. Are we seeing a drop in big-ticket purchases? Lucas: We are. And that feeds back into the CPI data. While goods inflation has cooled, services inflation remains sticky. The core CPI is at three hundred thirty-seven point eight, up slightly from the previous month. This suggests that while the price of stuff is stabilizing, the cost of living is still rising for consumers who are feeling the pinch of higher mortgage rates and insurance costs. Luna: It feels like the Fed is walking a tightrope. They want to cool inflation without causing a recession, but the labor data is sending mixed signals. Lucas: Walking a tightrope is exactly the right metaphor. And the tricky part is that the tools they use are blunt. Cutting the federal funds rate by twenty-five basis points might not be enough to jumpstart hiring if credit conditions remain tight. We’re seeing banks keep lending standards high, which means even if the Fed cuts, the transmission mechanism to the real economy is clogged. Luna: So the problem isn't just the policy rate, it's the credit spread and the willingness of banks to lend. That makes a simple rate cut less effective than it used to be. Lucas: Exactly. This is why we’re seeing such a divergence between the S&P 500, which is hovering around seven thousand seven hundred, and the broader economic sentiment. The stock market is forward-looking, betting on easier money, while the labor market is backward-looking, reflecting decisions made months ago. The gap between these two realities is where the next big economic shift will happen. Luna: I wonder if the Fed realizes that their lagged effect is hitting the labor market harder than the inflation numbers suggest. Are they underestimating the damage? Lucas: They are aware, but they are also constrained by political pressure and past mistakes. After the pandemic-era errors, the Fed is incredibly cautious about being seen as behind the curve. But caution can sometimes look like paralysis. If they wait for the unemployment rate to hit four point five percent before acting, they’ll be reacting to a recession, not preventing one. Luna: Four point five percent is a psychological barrier for sure. Most models suggest that’s where pain starts to set in for average households. Lucas: Right. And notice that the current four point two percent is rising from a historically low base. Every tenth of a percent matters more now than it did three years ago because the slack in the system is gone. There’s no idle capacity left to absorb shocks. This makes every data point critical. Luna: It puts a lot of weight on the upcoming NFP release. One bad number could force their hand entirely. Lucas: One bad number, or even one mediocre number that disappoints the overly optimistic consensus. The consensus is still expecting around seventy-five thousand jobs. A miss below fifty thousand would be a shock. Markets have priced in a soft landing, but soft landings often turn into hard bounces if the underlying data turns sour. Luna: So we’re watching for signs of fragility. What’s your read on the wage growth component? Is that still heating up or cooling down? Lucas: Wage growth is moderating, but slowly. Average hourly earnings are up roughly four percent year-over-year, which is above the two percent target but declining from the peaks of last year. This moderation is good news for the Fed because it breaks the wage-price spiral narrative. If wages aren’t skyrocketing, inflation should follow. Luna: That’s the key linkage. Without runaway wages, the Fed has more room to maneuver without reigniting price pressures. Lucas: Correct. And that gives them the optionality to cut rates in December or early next year without looking panicked. They can frame it as a 'data-dependent normalization' rather than an emergency rescue. That’s a much better political narrative for Chair Powell and the board. Luna: Normalization sounds much better than 'rescue.' Do you think the bond market agrees with this timeline? Lucas: The bond market is mostly there. The two-year Treasury yield has dipped closer to the current federal funds rate, indicating that traders are pricing in cuts within the next six to nine months. The ten-year is still anchored higher due to fiscal concerns and term premiums, but the short end is signaling acceptance of the easing cycle. Luna: So the financial conditions are loosening just enough to keep the economy afloat, even if the labor market is stumbling. Lucas: Yes, and that’s the delicate balance. Financial conditions are the Fed’s indirect tool. By allowing yields to stabilize, they are providing some relief to borrowers. But they won’t cut aggressively until the labor market confirms that the worst of the tightening is over. We are in that waiting period right now. Luna: Waiting is the hardest part for investors. Every data point feels like a coin flip. Lucas: It is. But remember, the Fed’s job isn’t to maximize returns; it’s to stabilize the currency and the labor market. Their mandate is dual, and right now, the inflation part of the mandate is largely satisfied, leaving the labor market as the sole focus. That’s why this September report carries so much weight. Luna: It shifts the entire burden onto employment numbers. Inflation is off the table as a primary concern for now. Lucas: Exactly. Core PCE at three percent is acceptable. Unemployment at four point two percent is concerning. The asymmetry of risk favors a cut over a hold in the coming months. The question is just how aggressive that cut will be. Luna: I suspect a quarter-point cut is the most likely outcome, but the guidance accompanying it will be the real story. Lucas: Agreed. The language will tell us more than the number. If they sound dovish, markets will rally. If they sound hawkish, we’ll see volatility spike. It’s all about managing expectations at this stage. Luna: Managing expectations is half the battle. Let’s hope the next report gives them the clarity they need to act decisively. Lucas: Let’s hope so. Because if the labor market continues to weaken at this pace, the Fed might find themselves playing catch-up sooner than anyone anticipates.