Private Hiring Rebounds, Sending Mixed Signal for Fed Rate Cut in December

Job growth in the private sector made a surprise surge last month, raising doubts about whether the Federal Reserve will continue cutting interest rates in December.

Companies added 42,000 jobs in October, more than expected and the first monthly payroll growth since July, according to data released by payroll processor ADP on Wednesday.

With federal employment reports on hold due to the government shutdown, the monthly ADP report has emerged as the next best indicator of the health of the labor market and a key factor for Fed policymakers.

The October data showed a rebound after two months of weak hiring, with education, health care, trade, transportation, and utilities leading the growth. For the third straight month, employers shed jobs in professional business services, information, and leisure and hospitality.

"Private employers added jobs in October for the first time since July, but hiring was modest relative to what we reported earlier this year," says ADP Chief Economist Nela Richardson. "Meanwhile, pay growth has been largely flat for more than a year, indicating that shifts in supply and demand are balanced."

Although the hiring rebound seen last month was not broad-based, it still raises new questions about whether the Fed will continue lowering interest rates in December, after two rounds of cuts intended to shore up the labor market.

Financial markets now estimate a 63% chance of a quarter-point rate cut next month, down from a 69% probability a day earlier.

The bond markets that determine mortgage rates are reacting, with the yield on the 10-year Treasury jumping above 4.15% on Wednesday, its highest level in nearly a month.

Long-term bond yields have been trending higher since last Wednesday, when Fed Chair Jerome Powell warned that another rate cut in December is "far from" certain.

Although the majority of the rate-setting Federal Open Market Committee (FOMC) voted for a rate cut last week, Powell acknowledged there were deep divisions on the panel about the best path forward.

"In the committee's discussions at this meeting, there were strongly differing views about how to proceed in December," said Powell. "A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it. Policy is not on a preset course."

Wednesday's jobs report will give ammunition to hawks on the FOMC who are worried about lingering inflation, putting upward pressure on mortgage rates in the near term.

The Fed uses higher interest rates to fight inflation and lower rates to stimulate the job market, in keeping with its dual mandate to maintain price stability and maximum employment.

The central bank doesn't set long-term rates like mortgage rates directly. Instead, it controls the short-term overnight rate for lending between commercial banks. Investors ultimately determine mortgage rates, but their expectations about future Fed actions and financial conditions play a key role.

Average mortgage rates reached a one-year low of 6.17% last week, according to Freddie Mac. But the new weekly average due out on Thursday is likely to show a healthy uptick in rates, following Powell's comments and the new ADP data.