The Fed: Jobs report provides reason for Fed caution on interest rates next year

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Senior economics reporter

Federal Reserve Chairman Jerome Powell will hold a press conference at the end of the Fed’s two-day meeting on Dec. 19.

The November jobs report is strong enough to keep the Federal Reserve on track to raise interest rates later this month, but the central bank will turn cautious and slow the pace of rate hikes in 2019, economists said Friday.

The Fed has generally been hiking at once per-quarter pace since late 2016. Economists expect that pace to slow to two rate hikes in 2019.

The November jobs data “gives… ammunition” to Fed officials advocating caution, said Omair Sharif, senior U.S. economist at Societe Generale in New York.

On Thursday, Dallas Fed President Robert Kaplan said he wanted to see the Fed become more patient.

Read: Fed still likely to raise interest rates in December

Lewis Alexander, chief U.S. economist at Nomura, said the market thinks that any pause in Fed rate hikes would be the end of the tightening cycle. But Fed officials “like to think they have the option to slow down,” he said.

Since the Jackson Hole meeting late this summer, Fed Chairman Jerome Powell has stressed the central bank was approaching a “transition” away from a steady pace of raising rates to a period of being less predictable, Alexander said. Powell has used the analogy that the Fed is in a dark room and needs to be cautious moving around.

“There is an impressive amount of uncertainty.”

Lewis Alexander, chief U.S. economist at Nomura

“We’re close” to that transition,” Alexander said. Going forward, the Fed is going to be more reactive. This will lead to only two moves next year.

The November job report by itself was not a game-changer, economists said. While job growth slowed down, the trend is still strong enough to keep the unemployment rate trending down.

Read: U.S. gains 155,000 jobs in November, unemployment rate steady at 3.7%

What has changed is the recent volatility VIX, -4.62%  in financial markets, Alexander said.

On its face, this volatility suggests to the Fed that balance of risks in the economy have shifted more to the downside, he said.

“There is an impressive amount of uncertainty around key policy issues” — including U.S.-China relations, Brexit and the outlook for U.S. fiscal policy, Alexander said.

The message from the Fed in December will that the rate hike is justified as the economy is doing well but looking forward there is a lot of uncertainty, he said.

Kevin Cummins, senior U.S. economist at NatWest Markets Securities Inc., said the message from the Fed will be they are backing away from any plan to take interest rates into restrictive territory.

“They’ve shifted to calm market a little bit,” he said, adding he also expects two hikes next year.

After a positive opening, stocks turned lower in morning trading. The Dow Jones Industrial Average DJIA, -0.50%  was recently down 10 points.

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