Kathy Bostanjcic has long been in the camp arguing for and predicting rate cuts over this past year. She sees a Federal Reserve whose policy is still mildly restrictive, a labor market that has weakened, and inflation that is likely at its peak or close enough to it that the Federal Reserve still has room to cut rates more before it declares victory.
All the more reason to put great weight on what she sees in the latest - albeit long awaited and still backward-looking employment report only just-now issued for the month of September.
”From my viewpoint, what it does is just further throws cold water on the idea that we are going to get a December rate cut from the Fed. Those odds were already declining, even before this morning’s number, because the Federal Open Market Committee is increasingly more divided between…the so-called hawks and the doves,” she says.
”The hawks who say, hey, I’m a little worried about inflation being sticky, and the doves who are saying, no, I’m more worried about the labor market. In this data void… the hawks’ voices have kind of risen louder, and I would say more..officials sort of joining that part of the divide. So, I think it was going to be a tough hurdle, no matter what we got this morning.”
Kathy has been analysing the Federal Reserve and the U.S. economy in many different roles at Wall Street firms like Merrill Lynch, at the Conference Board, and now at Nationwide Mutual where she is Chief Economist.
So what does she think will be driving the Fed early next year and why does she still see more rate cuts on the table? For Kathy it’s all about the upper vs the lower cohort of American workers.
For the upper cohort she says interest rates are likely not factoring too much into their decisions. “They are already locked into low mortgage rates, they’re not really levered up on their credit cards as much as the lower portion of the cohort… They maybe don’t even need to rely as much on auto loans… to purchase an auto.”
The other side of the Fed-needs-to cut rate coin? “As for the middle-income, lower-income households <they> are feeling the pressure, and so I think lower interest rates could really help them.”
Here’s Kathy’s clincher. “Now, the caveat is, I have to be right that inflation is kind of reaching its top, and is about to decelerate next year.”
So dive in and hear more about the key numbers in the jobs report including a healthy increase in average hourly earnings which led the bond market to conclude what is essentially a rise in wages to further strengthen the case for a Fed pause on rate cuts in December.
And don’t miss what her Nationwide team found when it looked at the impact of AI growth on jobs and productivity. Spoiler alert: they estimate that 80% of recent growth in the U.S. economy has come from AI investments.
September employment report: Old but still Gold 00:01:40.780
It’s old, stale data from September. On the other hand, it is the gold standard for employment, updates on the economy, and so while we had some private sector data to kind of chew on in the meantime, this is really great to get this type of data.
Jobs report douses enthusiasm for December rate cut 00:02:05.870
From my viewpoint, what it does is just further throws cold water on the idea that we are going to get a December rate cut from the Fed. Those odds were already declining, even before this morning’s number. One, because, as you indicated, the Federal Open Market Committee is increasingly more divided between, you know, the so-called hawks and the doves…
Worried about sticky inflation 00:02:30.870
…The Hawks who say, Hey, I’m a little worried about inflation being sticky, and the doves who are saying, no, I’m more worried about the labor market. In this data void that you talked about, the hawks’ voices have kind of risen louder, and I would say more, you know, officials sort of joining that part of the divide. So, I think it was going to be a tough hurdle, no matter what we got this morning…
Jobs gain stronger; wage portion a touch weaker 00:02:54.970
… the fact that (the jobs number) was actually was stronger than expected, I think, just supports the Hawks case. the only little wrinkle there, not wrinkle, but additional data that kind of we have to digest is that the average yearly earnings increase was only up 2 tenths on the month. We had been used to seeing 3 tenths per month, right?…
Markets flummoxed by timing on oncoming releases 00:03:18.500
…That actually, ironically, the bond market started to price in a little bit higher odds of a December rate cut, saying, hey, don’t have wage pressure, that should help the inflation picture. But I think overall, the Fed is… and because we’re not going to get the October CPI, we’re not going to get the household survey for October, the employment data. We will get the establishment non-farm employment count, but that’s going to be folded into the November report, which… that itself is going to be delayed until December 16th, and the Fed meets on December 10th.
Jobs by the numbers: Higher now than “natural rate of employment”… 00:05:21.350
The break-even, so-called break-even on non-farm payrolls is probably around 50,000 to 60,000 <per month>. So the fact that… and break-even means it just keeps the unemployment rate steady. The fact that we got more than double that, right, or roughly double that, suggests that September was very strong. Now, of course, you do have to balance that with August, or maybe even the month before, and look at a 3-month moving average.
Job picture is more improved…looks solid 00:05:45.150
It’s a more improved picture than what we thought. And it tells us, like, right before the government shutdown, labor market was not on the precipice of, you know, declining sharply. That there was some strength and a rebound. Now, what we really do need to see, though, is that the October and November data, really, to see what the momentum is.
We did get, a more up-to-date reading with jobless claims, right? Those are now being released on a national level, and… and it was very low. 220,000 was initial jobless claims, so there’s not a lot of, despite some headline announcements, there’s not a lot of layoffs going on in the economy right now, so…eah, I think the labor market, it’s solid. I wouldn’t say it’s booming, even though September’s a little stronger. It’s solid. When you
Buoyant consumer is buoyant, still-low unemployment: no pressing need for a cut 00:07:10.220
The consumer overall buoyant, and that supports GDP growth, of course. I think, you know, prior to the September data, the unemployment rate was rising gradually. Very… it’s still very low, right? Even… it was 4.3 before today. When you kind of try to assess, okay, how much has declined in supply of labor versus demand played out in the labor market, right? So are we getting, you know, we said the break-even numbers lower, on non-farm payrolls, and that’s because labor supply has declined a lot, right? We have stricter immigration, enforcement rules now. But… at the same time, the unemployment rate rising, it was indicative of demand cooling more than supply, so meaning there really was a slowdown in labor market. That’s what Chairman Powell flagged.
Governor Waller particularly, was very adamant making the case, the labor market’s softening, we have rates too high, let’s cut them. Today’s increase, though, wasn’t as worrisome. It’s because more people entered the labor force, so the so-called participation rate rose slightly. And if you look at the household survey, which also produces employment. estimates for the month, it was even stronger than the non-farm payroll increase.
Cyclical weakness but special factors still in play 00:44.510
Manufacturing and some other sectors that, you know, we watch that are more… considered more cyclical. They’ve been weak for a long time. It really, in our view, it does make the case that the Fed Reserve could start to lower interest rates, you know, even though the secular growth of employment is steady, in healthcare particularly. You’re seeing the cyclical sectors of the economy still kind of suffering, really. And, we don’t see the inflation increase we’ve seen is persistent or picking up, and we don’t think further rate cuts are going to fuel that.
We think that there are other factors going on. Productivity growth has been quite good, and with the advent of AI, once that really kicks into productivity growth, it’s actually disinflationary. We may not be there yet… little premature to declare victory there, and, you know, that’s why some of the Fed officials… and then, you know, we had announcements from Walmart and other retailers. Even though Walmart beat expectations and guided their outlook higher, they said they were warning that price increases may be coming. So maybe that is that still delayed tariff impact.
Still concern over prices and timing of tariff pass-through 00:13:04.980
<More price increases to come>…That is the concern of some of the Fed presidents. Even… they’re not current voting members, but they’ll be rolling on next year. Like, I’m thinking about Beth Hammock, who’s the president of the Cleveland Federal Reserve, and also others, you know, regional Fed presidents that are a little bit more concerned. Lori Logan from the Dallas Fed. about that very phenomena you talk about. And that may be very well the case. The retailers are going to wait, and have waited. And given some of this resilience of the consumer and the economy, figure, okay, with the new year particularly, we could start to roll out and push through some of these higher prices.
AI and data centers provide a solid push to GDP 00:14:20.640
Our team has done some work, and we’ve estimated the direct build of these data centers and the investment in software has contributed about 1.2 percentage points of GDP growth in the first half of the year. If you look at the growth in the first half of the year, it was only at 1.6%, so three quarters of the growth directly tied to the data centers. Then, you could add in the indirect impact, which has been, stock market is soaring, particularly the tech stocks. That feeds into the wealth effect, which allows upper-income households to spend more, right? Like, top 50% of households own stocks, and if their portfolios look better, they’re…And so we see that going on.
So it wouldn’t be, you know, a stretch to say that maybe 80% of the growth, at least 80% in the first half of the year, was coming from AI, either directly or indirectly. Now, that does raise some questions. On one hand, thank goodness, because it did help with growth, right? And it could really fuel… I’m in the camp that it’s going to fuel productivity gains going forward.
The ’Haves’ are doing better…the “Have Nots’ not so well 00:15:52.590
Narrative that we’ve all been talking about, that the, you know, the haves are doing better, both households and businesses, and the have-nots are falling behind and really struggling right now.
Fed independence and policy 00:17:02.940
I think it <Fed Independence> definitely is a concern. You know, the Federal Reserve doesn’t want to lose its independence. That would really be quite a negative for the economy and the financial markets. Investors don’t want that. They, they really want the Fed and the next chairperson to decide monetary policy based on data, not, you know, political influence or pressure. So, you know, it may be that, you know, Fed Governor Miran’s right. Maybe interest rates are too high and they should go more aggressive, but it should really be based on the data, not this perception that it’s coming from a bias. That said, I think he does really believe it, too, so it’s, it’s, it’s, you know, it’… it’s a difficult question, but I think that it’s really, it is very important for the Fed to be seen as kind of immune from political pressure. It just complicates everything. And it could be the Federal Reserve… you could make a case the Federal Reserve cuts
Markets are showing concern 00:18:14.720
You know, short-term insurance rate <cuts are one thing> … but long-term rates go higher because they’re worried that inflation expectations are going to rise, that they’ve overdone it. We’ll have to see, really assess the composition of the Federal Open Market Committee, because also the chairman alone, while very powerful and sort of directs things, right, isn’t the only voice. There are 19 members of the Federal Open Market Committee, and only 12 of them are voting. But it is a wider range of voices there, but we have to see, because… There’s, you know, the Fed governors reaffirm the appointment of Fed presidents, so all of the regional Fed presidents are up for reappointment in February.
Data delays due to personnel shortages? 00:20:23.110
My sense… my sense <of the BLS data delay> is they’re really delaying it, because it’s not just as… it’s not just, hey, we turn the lights off, let’s turn it back on, everything goes back to normal with data collection and… and… and assembling the data and publishing it. Also, these agencies are down about…25. of personnel, over… over the last year, and I think since the government shutdown, they’ve probably lost even more people. And I think that upper ranks, it’s something like a vacancy of a third. So this is really serious. There’s a lack of, you know, researchers and and the statisticians who work on this data and collect it. And so that… and I think that makes it even slower to be able to then get back onto track and assemble the data. Now.
Hard policy choices but more rate cuts ARE needed for lower cohort 00:22:31.230
Yeah, it is a tough time to make, you know, policy decisions, but I’m in the camp that they should be easing rates. I do think, that, the level of rates is too restrictive Given what I see in the cyclical economy, when I look at the lower cohort, right?
So, the upper cohort… <it’s about> stock prices, AI investment, households, you know, connected to that. I don’t think interest rates are factoring too much into their decisions, right? They’re probably locked into low mortgage rates, they’re not really levered up on their credit cards as much as the lower portion of the cohort. They’re maybe not… they maybe don’t even need to rely as much on auto loans, right, to purchase an auto.
But middle-income, lower-income households are feeling the pressure. And so I think lower interest rates could really help them. Now, the caveat is, I have to be right. That inflation is kind of reaching its top, and is about to decelerate next year.
Still prefer lower rates… 00:23:58.720
I’ve got complete respect for those who say, let’s slow, and slow things down and wait, but my sense is I’d like to see a firmer… lower interest rates to help the labor market picture, but also to lower rates, borrowing costs, for those households who are not, you know, part of the, you know, the AI boom, frankly.
Kathy Bostjancic
Kathy Bostjancic is Senior Vice President and Chief Economist for Nationwide Mutual. Kathy leads a team of economic analysts delivering economic forecasts and analyses that are used to inform and strengthen the organization’s business strategies and operating plans.
Prior to joining Nationwide, Kathy served as chief U.S. economist at Oxford Economics where she was responsible for assessing and forecasting the U.S. macroeconomic environment including Federal Reserve’s monetary policy, and its impact on industries and financial markets. Kathy served in similar roles at The Conference Board, Merrill Lynch, Union Bank of Switzerland (UBS), and Citicorp Investment Bank where she provided analyses on both U.S. and global macroeconomic topics, including international capital and foreign exchange markets, housing markets, U.S. consumer research, and global inflation and labor markets.
Kathy is a noted economic expert who holds a master’s degree in economics from New York University and a bachelor’s in economics from Rutgers University. She is a is a frequent speaker to media and industry groups on the economic outlook, monetary policy, macroeconomics and financial markets.
