ROI-Murky US jobs data risk deepening historic Fed divisions: McGeever

The clearest snapshot of the U.S. labor market will be released on Friday, but December's employment report likely won't provide enough clarity to bridge the deep divisions among Federal Reserve officials over the future path for interest rates. By some measures, the ‌divergence of opinion on the Fed's rate-setting committee – long a consensus-driven body - is the widest in decades. Jobs data is currently the Fed's guiding light, but the signals are pretty murky. Sure, there is broad-based agreement that the labor market is weak. But weak enough to warrant further rate cuts on top of the 175 basis points already delivered, when ⁠inflation is near 3% and about to enter a sixth year above the Fed's 2% target?

Second-tier jobs figures on Wednesday didn't offer much clarity. Private sector job growth rebounded less than expected in December, yet the ISM services sector employment index was the highest in nearly a year. Meanwhile, the Job Openings and Labor Turnover Survey, or JOLTS report showed that job openings in November were well below forecasts, but it also noted that layoffs fell sharply. Ultimately though, the JOLTS, ADP, ISM employment index ​and Thursday's weekly jobless claims are all just the opening act for the main show on Friday, when the Bureau of Labor Statistics releases December's non-farm payrolls job growth and unemployment rate.

Economists expect modest job growth of 60,000 and ‍a slight drop in the unemployment rate to 4.5% from 4.6%. Given the decidedly murky labor market picture, the Fed could be on hold for some time, absent further evidence of labor market weakness. Interest rate futures markets aren't fully pricing in the next quarter percentage point cut until June.

MIND THE GAP Predicting how the Fed will move could become a lot more challenging this year, however, because the rate-setting Federal Open Market Committee is divided like rarely before.

Here's a quick recap of what emerged from the Fed's policy meeting last month when it lowered the Fed funds target range ⁠by 25 basis points ‌to 3.50-3.75% and published its latest staff economic projections: *December marked the ⁠strongest hawkish pushback against a rate cut since 2019

*This was the first meeting with three dissents since 2019 *The "dot plot" showed seven out of 19 officials expect rates to hold at or above current levels

Indeed, dissenting votes by Fed Governors last year surged to their highest level since 1993, ‍following three decades that saw just five dissents in total. Until December, the FOMC had not recorded three or more dissents at a single meeting since 2019, a level of disagreement seen just nine times since 1990. This divergence appears to be widening.

Directors at two-thirds ​of the Fed's regional banks voted not to change the interest rate charged to commercial banks for emergency loans. This recommendation was ultimately overruled by the FOMC's 9-3 vote to lower the policy rate, but it highlights just ⁠how contested that easing decision was. FED BANK PRESIDENTS VS GOVERNORS

For all the talk of a more dovish Fed this year under the guidance of a new chair appointed by President Donald Trump, the reality may be quite different. Trump is expected to nominate current Chair Jerome Powell's successor later this month. ⁠Powell, who steps down in May, is considered a natural policy "dove". He is known for his consensus-building skills but also his fierce defense of the central bank's independence. His successor will lean dovish too, but may find it more difficult to sway the committee.

That's in part because of the growing divide between Fed governors, who have been pushing for rate cuts, and regional Fed bank presidents, who have been less willing to look through sticky inflation. And, importantly, the Fed's Board of ⁠Governors last month unanimously reappointed 11 of the Fed's 12 regional bank presidents to their positions, the exception being Atlanta Fed chief Raphael Bostic, who is retiring.

Ultimately, the FOMC's rate decisions this year should hinge on whether officials believe ⁠inflation is a bigger risk to the economy than unemployment. Powell ‌successfully made the case for the latter last year, but the dissenting voices are getting louder, and the politics are getting more complicated. Investors assuming rate cuts are in the bag may want to think again.

(The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential source for global financial ⁠commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on ‍LinkedIn and X.

(By Jamie McGeever; Editing by Marguerita Choy)

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)