Fed Chair Jerome Powell is expected to keep interest rates steady at the final Federal Reserve meeting of the year, but economists say he could strike a more dovish tone as the labor market showed mixed signs.

Following the delayed release of September's employment data, Bank of America economists said the rising unemployment rate makes a "dovish hold" the most likely outcome for December.

The U.S. economy added 119,000 non-farm payrolls, sharply reversing the downwardly revised 4,000 job loss for August, but the unemployment rate rose to 4.4%, the highest since October 2021.

"The u-rate rose to 4.440% in Sep from 4.324% in Aug and 4.117% in Jun. This is a substantial pickup," said Bank of America economist Shruti Mishra.

She also noted the surprising 33,000 downward revision to the last two months of data, with August revised down from a 22,000 gain to a 4,000 loss.

A Fed Divided: Hawks vs. Doves

The new data deepens the split within the Federal Open Market Committee (FOMC). According to Bank of America's read, doves on the committee will emphasize the 32-basis-point increase in unemployment over the past three months, viewing it as the clearest indicator of rising labor-market slack.

Hawks, on the other hand, may highlight the strong payroll beat, stable income growth and increased labor force participation as evidence that the labor market isn't cooling fast enough to justify another rate cut, especially with inflation still above the 2% target.

"The September jobs data won't do much to resolve the disagreement on the FOMC," Mishra said, suggesting Powell may signal flexibility while keeping rates steady for now.

Markets Align With ‘Dovish Hold' View

"A December cut is still not our base case, but it's a closer call now given the u-rate jump," Mishra said.

"A ‘dovish hold' might be a good compromise for Powell given the mixed bag September report."

Bill Adams, chief economist at Comerica, said the September Fed minutes characterized the labor market as undergoing a "very gradual cooling," but that view looks overly optimistic in light of the latest data.

Adams highlighted how policymakers will miss the official November employment report ahead of their next meeting, relying instead on private estimates, just as they did when deciding to cut rates in October.

"Payrolls rose more than expected, but the trend still looks modest after downward revisions to July and August," Adams said.

He added that while the Fed has been downplaying the odds of another cut, this report "prods them in the other direction." Despite lingering concerns over stock market valuations, tariff-driven inflation, and climate-related food price pressures,

Comerica now sees a rate cut in December as more likely than not.

What Is The Bond Market Saying?

Rate cut odds for December ticked higher on Thursday, with Fed futures now implying a 37% probability—up from around 25% before the September jobs report.

Treasury yields eased modestly in response to the data, with the 2-year yield slipping 3 basis points to 3.56%, while the 10-year yield also fell 3 basis points to 4.11%.

The iShares 20+ Year Treasury Bond ETF rose 0.3%, on pace to break a two-day losing streak.

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The Fed Is Split – And A December Rate Cut Moves Further Away

Image created using artificial intelligence via Midjourney.