Rising US unemployment paves way for Fed rate cut

Unemployment in the United States unexpectedly rose to 4.2 percent last month, paving the way for the Federal Reserve to cut interest rates before Christmas.

The 4.1 percent increase gives the country’s central bank room to make cuts, even though overall employment numbers were better than expected.

They grew by 227,000, but that was a rebound after the hurricanes took a toll on hiring in October.

Samuel Tombs, chief U.S. economist at research firm Pantheon Macroeconomics, said the recovery was “muted” and “implies that the underlying trend has continued to deteriorate.”

He added: “In all, November’s labor market data gives the green light to the FOMC (Federal Open Market Committee, which sets rates in the US) to ease policy again this month.”

The Federal Reserve has already cut rates by three-quarters of a percentage point this year in response to falling inflation.

But central bank Chairman Jerome Powell has said there is “no rush” to move forward as the economy appears to be performing strongly at the current level of rates.

Any sign that the labor market is overheating in a way that would boost inflation could reduce the likelihood of rate cuts. On the other hand, weaker employment figures strengthen the case for cuts.

The situation has been further complicated by the election of Donald Trump as president with a promise to impose huge tariffs on imports, a policy that would increase inflation.

Financial markets viewed the latest jobs data as increasing the chances of a cut at the next Federal Reserve meeting on December 18.

Traders now see a 90 percent chance of a quarter-point reduction, down from 67 percent before the numbers were released.

IG chief markets analyst Chris Beauchamp said: “It opens the way for a rate cut by the Federal Reserve.” The message will probably be that we have job creation where we want it to be, but we have to cut back because of unemployment.’

Stephen Brown, deputy chief North American economist at Capital Economics, said the central bank will now closely examine next week’s inflation data.

The annual U.S. consumer price index (CPI) inflation rate is forecast to rise from 2.6 percent to 2.7 percent.

“Next week’s CPI and producer price index data will be the main determinant of the Fed’s interest rate decision this month,” he said.

“Based on our forecast for a softer price rise in November, we expect a 25 basis point cut rather than a pause.”