US unemployment rise paves way for Fed rate cut

Unemployment in the US rose unexpectedly to 4.2 per cent last month, which paves the way for the Federal Reserve to cut interest rates before Christmas.

The increase from 4.1 per cent gives the country’s central bank leeway to cut, even though overall job numbers were better than expected.

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

Samuel Tombs, chief US economist at research firm Pantheon Macroeconomics, said the bounce-back was ‘muted’ and ‘implies that the underlying trend has continued to deteriorate’.

He added: ‘All told, November’s labour market data give the FOMC [Federal Open Market Committee, which sets rates in the US] the green light to ease policy again this month.’

The Fed has already cut rates by three quarters of a percentage point this year as it responds to falling inflation.

But the central bank’s chairman Jerome Powell has said that it need be in ‘no hurry’ to press on since the economy seems to be performing strongly at the current level of rates.

Any sign that the labour market is overheating in a way that would push up 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 on a promise to impose swingeing import tariffs – a policy that would drive up inflation.

Financial markets judged that the latest jobs data increase the chances of a cut at the Fed’s next meeting on December 18.

Traders now see a 90 per cent chance of a quarter point reduction, up from 67pc before the figures were released.

IG chief markets analyst Chris Beauchamp said: ‘It clears the way for a rate cut from the Fed. The message will likely be that we have job creation where we want it to be, but we need to cut because of unemployment.’

Capital Economics’ Stephen Brown, deputy chief North America economist, said the central bank would now be looking closely at next week’s inflation data.

The annual rate for US consumer price index (CPI) inflation is forecast to tick up from 2.6 per cent to 2.7 per cent.

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

‘Based on our forecast for a softer gain in prices in November, we expect a 25-basis points cut rather than a pause.’