The Federal Reserve's basic assumptions are on the verge of collapse! Will the non-farm payroll "slap in the face" Powell?

The latest forecasts and recent public comments from the Federal Reserve show that the overall economy will remain stable, but the job market is expected to weaken and become an increasingly concerning issue.

Federal Reserve Chairman Powell admitted this week the existence of "tensions" and stated that future employment data in the coming months, rather than other economic indicators, "may more accurately reflect" the evolving economic situation.

First is the September non-farm payroll report released on Friday. This report may be a crucial factor in determining whether the "baseline scenario" of a 25 basis point rate cut in the remaining two Fed meetings this year, as mentioned by Powell, remains intact, or if job growth unexpectedly slows down, or if wages unexpectedly surge, discussions may lean towards larger rate cuts or even pausing rate cuts.

During the 50 basis point rate cut in September, Fed officials indicated that their view on the risks facing the economy had shifted towards a higher-than-expected unemployment rate. 12 Fed officials saw "upside" risks in this data, compared to only 4 officials in the June forecast. Only 3 officials believed there was a significant risk of a sharp increase in inflation.

The Friday non-farm payroll report will provide insight into whether these risks are materializing. In addition, investors need to closely monitor not only key data such as the unemployment rate and new job additions, but also details like wage growth and long-term unemployment figures, with long-term unemployment numbers continuing to rise, indicating more challenging conditions for job seekers.

Is the "Economic Resilience" at Risk?

In a study conducted by Evercore ISI last week on the economic forecasts released by the Fed after the September 17-18 meeting, former Fed chief economist John Roberts stated that rate cuts are accompanied by rising unemployment rate expectations (albeit slightly), indicating that the resilience shown by the U.S. economy before June, i.e., the strength of the economy under high interest rates, has largely disappeared.

Roberts wrote that the risks tend towards worse outcomes rather than better ones, and under otherwise similar conditions, the new Fed policy rate of 4.75%-5.00% may exert more pressure on the economy than expected.

Atlanta Fed President Bostic stated in an interview this week that if the monthly net new job additions are significantly below 100,000, he would consider it as evidence that the Fed may need to cut rates faster. Bostic believes this number is roughly the equilibrium rate needed to provide jobs for new entrants to the labor market.

University of Chicago economics professor Ufuk Akcigit expressed concern over the trend he observed - despite stable corporate income, job growth is declining.

From August to September, small business employment decreased by nearly 5,000, continuing to trend downwards, indicating that businesses have become more anxious. "Given the fragile environment, hiring someone has become a major decision," he said. "Businesses are becoming more risk-averse." Economists estimate that U.S. employers added 140,000 jobs last month.

Bostic stated that he is not "eager" to cut interest rates, but the core issue has shifted to "whether the economy is still creating net new jobs?... How many in total? What is the situation?"

He mentioned that due to uncertainties such as immigration, it is difficult to estimate the "steady-state" level of job growth, a number below 100,000 would raise "another level of questioning to understand to what extent this is an outlier... or if it points to something more fundamental."

Bostic also mentioned that he will be looking at how many industries are adding jobs, "to see if it is broad-based or concentrated in a specific sector."

Is the Unemployment Rate at Equilibrium?

From many indicators, the current U.S. unemployment rate is 4.2%, which is quite good. Federal Reserve policymakers believe that given the speed and magnitude of the decline in inflation, this is particularly important, as significant declines in price pressures are often associated with slow economic growth or a complete recession and high unemployment rates.

The unemployment rate as of August is far below the average unemployment rate since the late 1940s of 5.7%. What is important for the Federal Reserve is that the unemployment rate is now exactly at the level that the median Fed policymaker believes is consistent with the long-term target inflation rate of 2%.

However, the unemployment rate has been steadily rising over the past year, enough to trigger some reliable recession indicators. According to the Fed's own forecasts, the unemployment rate will continue to rise to some extent.

Historically, this situation is not optimistic. Once the increase in the unemployment rate exceeds half a percentage point within a year, the unemployment rate tends to continue to rise significantly. Policymakers will keep this in mind when reviewing the latest data.

"The unemployment rate is decent, but the trend line is not ideal," said Richmond Fed President Bostic. It is a pending issue whether the unemployment rate is stabilizing at an "appropriate level," meaning whether the unemployment rate will hover around a sustainable level every month, or is about to break through this level and continue to rise.

Most investors currently expect the Fed to cut the benchmark interest rate by another 25 basis points at the meeting on November 6-7, and Friday's data may confirm or begin to change this expectation. Bostic said:

"At each meeting, we get one or two new employment reports, one or two new inflation reports. If you are right in your judgment, your confidence will grow. If the data comes in a different way, you can react accordingly."