September nonfarm payrolls increase uncertainty; JPMorgan: The Fed will "skip" a rate cut next month, restart in January and May next year.

Following Morgan Stanley, JPMorgan has become the second major Wall Street investment bank to withdraw its prediction of a Fed rate cut in December, believing the Fed will pause rate cuts due to mixed signals from employment data, but maintains its forecast for rate cuts to resume in January and May next year.

In its latest research report, JPMorgan pointed out that nonfarm payrolls increased by 119,000 in September, the highest since April, and the employment diffusion index jumped to 55.6%, the highest level since February. However, the unemployment rate simultaneously rose by 12 basis points to 4.44%, presenting contradictory signals.

Therefore, the bank expects the Fed will choose to keep interest rates unchanged at the upcoming meeting, but the rate cut process has not ended completely and is postponed to rate cuts in January and May 2026.

Chief Economist Michael Feroli stated, “This tailor-made mixed report will spark intense debate at the next FOMC meeting, with the decision extremely close, and whether to pause or continue rate cuts may see several committee members dissent.”

JPMorgan believes that Fed Chair Powell and previous meeting minutes have hinted that the committee is looking for reasons to slow down the pace of rate cuts, and the September jobs report provides precisely such an opportunity.

Contradictory Signals in Employment Data

The report states that the core contradiction in the September nonfarm payrolls report lies in the divergence between quantity and quality.

Business surveys showed nonfarm payrolls increased by 119,000, the strongest gain since April. Even more encouraging, the previously worrying downward trend in employment breadth has reversed, with the employment diffusion index jumping to 55.6% from last month’s low.

But household survey data paints a more cautious picture. The unemployment rate continued to rise, up 12 basis points to 4.44% in September, extending the upward trend that started this year. This increase was partly offset by the labor participation rate rising to 62.4%, while the employment-population ratio also rose by 0.1 percentage point to 59.7%.

By sector, government employment increased by 22,000, all from state and local governments. In the private sector, construction employment rose by 19,000, the most in a year; healthcare increased by 43,000; leisure and hospitality grew by 47,000, mainly in food services. Factory employment fell by 6,000, continuing its decline since April.

Wage data also sends mixed signals. Average hourly earnings in September grew 0.2% month-over-month, slightly below expectations, but after upward revision, year-over-year growth was 3.8%, slightly above expectations. Wages for production and nonsupervisory employees also grew 3.8% year-over-year. Average workweek remained unchanged at 34.2 hours.

Notably, this time the data collection completion rate rose to 80.2%, the highest monthly level since the end of 2019. JPMorgan believes this means additional compilation time was used effectively, improving the credibility of preliminary data and reducing the chance of major downward revisions in the future.

Readjusting Fed Rate Cut Expectations: Pause in December, Cuts in January and May Next Year

JPMorgan admits the Fed’s decision at next month’s meeting is “extremely close,” even harder to judge than last September. The report provides plenty of material for both hawks and doves, and regardless of the final outcome, several committee members may dissent.

The bank believes Powell and previous meeting minutes have hinted the committee wants to slow the pace of rate cuts, and the September jobs report gives a reason to pause rate cuts. But JPMorgan also reminds us that the political factors in the decision may be underestimated, and the judgment may rely too much on the statements of hawkish non-voting members.

According to the revised forecast path, the Fed will pause rate cuts in December, then cut rates in January and May next year, before entering a period of observation.

JPMorgan said it will closely watch the statements of voting members before the blackout period, and the final decision may not be determined until the Job Openings and Labor Turnover Survey (JOLTS) report is released on the first day of the meeting.

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