The latest US jobs report has raised alarms regarding the Federal Reserve’s interest rate policy, with Mohamed El-Erian, the chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, warning that “something is likely to break” as a result. The strong jobs data, indicating over 330,000 jobs added in September 2023, has been considered favorable for the current state of the economy. However, El-Erian sees potential drawbacks for both financial markets and the Federal Reserve, as the report may compel the central bank to sustain higher interest rates for an extended period.
While the immediate impact is seen as positive, the long-term implications are concerning. El-Erian believes that the jobs report aligns with his earlier prediction of a possible recession, underscoring the rapid shift in economic conditions. The US economy had become accustomed to remarkably low interest rates and liquidity injections, and this abrupt change in the economic landscape is happening at a swift pace.
The September nonfarm payrolls report significantly exceeded economists’ estimates, with the addition of more than 330,000 jobs, a notable increase from the anticipated 170,000. The data for August was also revised upward, and there was a 0.2% increase in average hourly earnings growth, mirroring the previous month’s figures.
The robust labor market has heightened expectations of a rate increase by the Federal Reserve at its November policy meeting. This shift in monetary policy has led traders to reconsider the timing of future rate cuts as the US economy experiences a slowdown. Notably, the swaps market now suggests a delay in the first 25 basis-point rate cut, moving it from July to September 2024.
El-Erian believes that the jobs report has put the possibility of a rate hike for November “back on the table.” He notes that markets must adapt to the concept of not only high interest rates for an extended duration but also the potential for even longer periods of elevated rates. Falling behind early in an inflation cycle can have significant consequences in the later stages.
Following the release of the jobs data, yields on US Treasuries experienced substantial increases, particularly in the five- to 30-year range. The 10- and 30-year rates approached levels not seen since 2007, although they later moderated. Additionally, a Bloomberg dollar index showed a strong rally in the aftermath of the report.
El-Erian’s concerns highlight the economic and market ramifications of the evolving interest rate environment in the United States.