© Reuters. FILE PHOTO: Federal Reserve Board Chairman Jerome Powell answers a question at a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., November 1, 2023.

By Ann Saphir and Howard Schneider

(Reuters) – Slowing U.S. job growth and cooling wage pressures may give Federal Reserve policymakers renewed confidence the U.S. economy is adjusting from the shock of the coronavirus pandemic, allowing inflation to continue to ease without the need for further interest rate increases.

That was the bet in financial markets after the Labor Department reported nonfarm payrolls increased by 150,000 last month, below the pre-pandemic trend for only the third time since December 2020, and hourly earnings rose 4.1% from a year earlier, the smallest increase since June 2021.

Bond yields fell, and traders of contracts tied to the Fed’s policy rate now see only a 12% chance of a rate hike by January, down from 30% before the release of the employment report. Rate futures pricing now reflects a better-than-even chance of a Fed rate cut by May of 2024, with several more cuts expected later next year.

U.S. central bankers themselves are not even thinking about rate cuts, Fed Chair Jerome Powell said this week after the Fed kept its benchmark overnight interest rate steady in the 5.25%-5.50% range. Policymakers are waiting for more confirmation the economy is coming into better balance after pandemic disruptions to the supply of goods and labor helped push inflation to 40-year highs last year.

But Powell also signaled a further rate hike could yet be in the offing as he and his central bank colleagues were not yet confident that monetary policy is restrictive enough to bring inflation down to the Fed’s 2% target. He cited the rise in longer-term borrowing costs, including the rise in 30-year fixed-rate mortgages to nearly 8%, as potentially doing some of the work that otherwise might be needed to be done by the Fed.

The drop in longer-term borrowing costs, with the yield on the benchmark 10-year Treasury note falling below 4.5% after the release of the jobs report, poses a problem that, if it continues, may actually bolster the case for another Fed rate hike to ensure overall borrowing conditions do not loosen.

That decision will hinge on the performance of inflation in the weeks leading up to the Fed’s Dec. 12-13 policy meeting. Investors and analysts at this point largely expect price pressures to continue easing and the Fed to remain on hold as a long-awaited slowdown in hiring appears to take shape.

The average monthly payrolls gain over the last three months has slowed to 204,000, the latest jobs report showed, after peaking in the summer of 2021 at 708,000. That is nearing the average monthly job gain of 183,000 during the 10 years leading up to the pandemic.

The report, Richmond Fed President Thomas Barkin told CNBC, was “welcome to see” and backs up information he has received from his business contacts.

“What I’ve been hearing is normalizing,” Barkin said. The key, he said, will be what reports on inflation show in coming months.

Inflation by the Fed’s preferred measure has held around 3.4% for the last couple of months, down from 7.1% last summer but still above the Fed’s 2% goal.

SOFT LANDING

After lifting the policy rate rapidly last year, Fed policymakers are seeking a stopping point that is high enough to bring inflation down but not so high that it does excessive damage to the labor market. Powell on Wednesday indicated the Fed is still steering toward what has been that historically elusive “soft landing” for the economy.

Overall the latest jobs report was “tailor-made to match Powell’s soft landing message from earlier this week,” as JPMorgan chief U.S. economist Michael Feroli said in a note to investors. And despite financial conditions loosening, he said, it will be the economic data that determines what the Fed will do, “and the data say we’re done with rate hikes.”

But he and other analysts also noted the report had hints of risk to that scenario, including a decline in the job-finding rate of those already unemployed, coupled with a second straight monthly uptick in unemployment.

“Continued upward momentum would be troubling, and hopefully this recent rise levels off as the labor market recovery continues,” said Indeed.com’s Nick Bunker.

Judging from the flow of workers into and out of jobs and job searches, said Inflation Insights’ Omair Sharif, it appeared workers were having a tougher time landing employment, a reversal from the heady days of the “great resignation” when employees were skipping from job to job and some occupations were registering double digit wage gains.

Employment at bars and restaurants, a locus of high labor demand during the pandemic, dropped in October, he noted.

Still for now, most of the worries about the labor market appear to be focused on what might, or might not, happen next rather than on the evidence so far.

“We are transitioning to the next phase of recovery,” said acting U.S. Labor Secretary Julie Su.