As the Federal Reserve approaches its December rate-setting meeting, analysts at Deutsche Bank see a patchwork of signals making the decision far from straightforward.
The September jobs report, in particular, provides "a perfect Rorschach test for Fed officials," the analysts wrote in a note to clients.
For officials leaning hawkish, the analysts detailed a case for holding rates steady. They point to the uptick in headline plus 119,000 and private plus 97,000 payrolls, a broadening of employment gains shown in diffusion indexes, upward revisions to average hourly earnings, a higher participation rate, and stable income trends.
"Continued low readings on initial jobless claims support the conclusion that, at worst, the labor market is slowly cooling," the analysts wrote.
Those more inclined toward caution, however, highlight signs of labor market softness. The unemployment rate rose to 4.44%, just shy of the 4.5% projection for Q4 in the September report, while downward revisions to previous months' employment data, including payroll declines in June and August, signal potential weakening. Rising WARN notices may also indicate that the historically low firing dynamic could be shifting.
Given these mixed signals, Deutsche Bank notes that the Fed is unlikely to converge on a single path. "For a Committee that may have been biased towards not cutting in December, the path of least resistance could be to skip the next meeting," the analysts wrote, citing Chair Powell's October remarks that a December rate reduction was "far from a foregone conclusion."
They also highlighted the October minutes, noting that "many" officials did not support a December cut and "most" were concerned that further reductions could stoke inflation risks.
The upcoming vote could hinge on individual preferences. Deutsche Bank anticipates three dissenters likely favoring a hold (Waller, Bowman, and Miran) versus up to five against a cut (Barr, Collins, Goolsbee, Schmid, and Musalem). Whether this reflects the broader views of non-voting members could ultimately sway the decision, the analysts noted.
Despite a compelling case for a 25 basis point cut based on labor market vulnerabilities, the analysts cautioned against aggressive easing. Inflation remains elevated, growth has outperformed expectations, and financial conditions are highly accommodative.
"With this backdrop, officials are right to be reluctant to cut rates too aggressively up front," they wrote.
Deutsche Bank's baseline still calls for a December reduction, though the probability has softened.
Upcoming economic data, including jobless claims, ADP payrolls, and JOLTS, will be critical to shaping the Fed's choice, the analysts added.
If the Committee opts against cutting this month, Deutsche Bank expects it to accompany the decision with a dovish message leaving the door open for potential easing in January.