Fed Chair Jerome Powell walks into the final Federal Reserve meeting of the year facing a classic central banking headache: the data is telling two different stories at once. September's employment report delivered decent job growth but also showed unemployment ticking up to uncomfortable levels, leaving economists betting Powell will hold rates steady while softening his rhetoric.
Here's what happened: The U.S. economy added 119,000 non-farm payrolls in September, a sharp turnaround from August's downwardly revised 4,000 job loss. That sounds encouraging until you notice the unemployment rate jumped to 4.4%—the highest reading since October 2021. Bank of America economist Shruti Mishra flagged the magnitude of that move: unemployment rose from 4.117% in June to 4.440% in September.
"This is a substantial pickup," Mishra noted. She also pointed out the surprising 33,000 downward revision to the prior two months, with August getting marked down from a 22,000 gain to an outright loss.
The Fed's Internal Debate Gets Louder
The mixed data is sharpening divisions within the Federal Open Market Committee. According to Bank of America's analysis, the dovish faction will zero in on that 32-basis-point unemployment surge over three months as clear evidence of growing slack in the labor market.
Meanwhile, the hawks have their own ammunition: strong payroll numbers, stable income growth, and rising labor force participation all suggest the job market isn't cooling fast enough to justify rate cuts—especially with inflation still running above the Fed's 2% target.
"The September jobs data won't do much to resolve the disagreement on the FOMC," Mishra said. She expects Powell to signal flexibility while keeping rates unchanged for now—what she calls a "dovish hold."
"A December cut is still not our base case, but it's a closer call now given the u-rate jump," Mishra added. "A 'dovish hold' might be a good compromise for Powell given the mixed bag September report."
Missing Data Complicates The December Decision
Bill Adams, chief economist at Comerica, pointed out that September's Fed minutes described the labor market as undergoing "very gradual cooling"—a characterization that looks optimistic given the latest numbers.
Adams also highlighted a complication: policymakers won't have access to the official November employment report before their next meeting, forcing them to rely on private estimates just as they did when deciding to cut rates in October.
"Payrolls rose more than expected, but the trend still looks modest after downward revisions to July and August," Adams said. While the Fed has recently downplayed the likelihood of another cut, this report "prods them in the other direction."
Despite concerns about elevated stock valuations, tariff-driven inflation risks, and climate-related food price pressures, Comerica now sees a December rate cut as more likely than not.
Markets Are Starting To Price In A Cut
Bond markets responded to the jobs data by nudging up the odds of a December rate cut. Fed futures now imply a 37% probability—up from around 25% before the report dropped.
Treasury yields eased modestly in response. The 2-year yield slipped 3 basis points to 3.56%, while the 10-year yield also fell 3 basis points to 4.11%. The iShares 20+ Year Treasury Bond ETF (TLT) rose 0.3%, on track to snap a two-day losing streak.
Powell's December meeting just got a lot more interesting. He'll need to thread the needle between acknowledging labor market weakness and maintaining credibility on inflation—all while managing a divided committee. A dovish hold lets him keep his options open without committing to either camp. It's not the most exciting outcome, but in central banking, boring often beats dramatic.
