The labor market is clearly slipping, markets can expect Powell to have to change his stance on rate hikes if trends continue, Pantheon chief economist says

• A weakening labor market could force Powell to pivot from hiking rates, Pantheon's Ian Shepherdson said.
• The chief economist estimated new jobs created per month could plummet to 100,000 by March of next year.

The labor market is showing signs of slipping, and if the downtrend continues, markets can expect Federal Reserve chair Jerome Powell to have to change his stance on rate hikes, according to Pantheon's chief economist Ian Shepherdson.

In a note on Monday, Shepherdson pointed to slightly softened jobs data in October, which showed the US adding 216,000 new payrolls – above estimates of 200,000 – and hourly earnings rising 0.4% – ahead of the median estimate of 0.3%. Those are signs that the labor market is still fairly hot, one of the reasons why Powell warned markets he didn't see a case for easing up on rate hikes just yet.

But Powell is ignoring the fact that the October report showed a rapid deterioration from figures seen earlier this year, Shepherdson warned, adding that it wasn't clear if Powell's "extremely aggressive stance" was shared by other Fed officials.

"The data supported the idea that the trend of rate of growth of both payrolls and hourly earnings is slowing," Shepherdson said, estimating that new payrolls would plummet to 100,000 by March of next year, making further rate hikes "dangerous."

"If these trends continue, markets will soon be pressuring the Fed to scale back their tightening plans, perhaps to the point where investors question any rate increases in 2023," he added.

Shepherdson noted the Fed was likely to raise rates by 50 basis points in December and by 25 basis points in January, due to the fact that December's employment report will be released after January's Federal Open Markets Committee meeting. But those policy moves could push the unemployment rate higher than the current 3.7%. Hiring indicators are starting to ease, and rising Google searches for "layoffs" suggest there is growing anxiety about job security.

"To be clear, we think they should stop now, and leave rates on hold in December, given the lagged impact of the tightening to date, but that's just not going to happen," he said.

That echoes the sentiment of other central bankers and economists. St. Louis Fed president Jim Bullard previously urged the central bank to pause its rate hike regime, and Wharton professor Jeremy Siegel warned the Fed could plunge the US into a recession if it keeps basing its rate hike decisions on lagging economic indicators.