By Ann Saphir
(Reuters) – A surge in U.S. job growth has financial markets betting the Federal Reserve will follow last month’s half-point interest rate reduction with smaller moves ahead, and ignited a debate over whether the policy rate ends up at a higher level than previously expected.
After the Labor Department reported on Friday a gain of 254,000 jobs in September and a decline in the unemployment rate to 4.1%, traders of futures that settle to the Fed’s policy rate all but abandoned bets on another upsized interest rate reduction before the end of this year.
They are now priced for quarter-point reductions at upcoming meetings, settling out somewhere between 3.25% and 3.75% by the middle of next year. That’s down from the current 4.75%-5.00% range, but above the 3.00%-3.25% end-point range that traders had previously seen likely.
A policy rate well above 3% would likely continue to impose some restraint on job and spending growth, based on Fed policymakers’ estimate of 2.9% as a “neutral” rate that neither brakes nor stimulates the economy.
Friday’s jobs report “is a potential game changer for the Fed and market expectations on the size and pace of future rate cuts,” BMO economists wrote. “It also is a big upside risk to our consumer spending and GDP growth forecasts in the near-term.”
Expectations could still change before the Fed’s Nov. 6-7 policy meeting, which will come after fresh data on inflation and another monthly jobs report. The Fed has said it wants to recalibrate the policy rate as inflation drops closer to its 2% goal and the labor market cools.
(Reporting by Ann Saphir; Additional reporting by Karen Brettell and Lucia Mutikani; Editing by Jason Neely, Andrea Ricci and Susan Fenton)
