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The labor market offered an unexpected surprise on Friday as the September jobs report showed 254,000 payrolls added in September — 104,000 more than expected.

Worries of a flagging labor market have been the main point of economic focus over the past month as the conversation has turned from inflation, which appears to be in control at last, to the other half of the Fed’s dual mandate.

In the leadup this week, two key reports showed mixed data. The JOLTS numbers showed more job openings, but more conservative hires and quits. The ADP numbers showed surprising strength in private payrolls, but lower wage gains for job switchers — a key labor market thermometer that dogged the inflationary 2021 and 2022 years.

As our Chart of the Week shows, the economists have been caught off guard. September’s report has suddenly changed expectations for the Fed’s trajectory, as the market now sees four 25 basis point rate cuts over the next four meetings and a higher terminal rate when the cuts end.

Renaissance Macro Research's Neil Dutta sees the print as bolstering the guidance of a 25 basis point cut per meeting until 2025, noting that the report “overwhelms all other employment indicators” that showed a weakening labor market.

“Today’s data might be the first sign of stabilization,” Dutta wrote on X, formerly Twitter.

Nearly every note we saw from Wall Street economists Friday was in agreement. This shifting dynamic suggests that not only is 50 basis points off the table for November’s meeting — some are even questioning any further cutting with numbers so strong.

"Looking at the [labor] market strength evident in September’s employment report, the real debate at the Fed should be about whether to loosen monetary policy at all," Capital Economics chief North America economist Paul Ashworth wrote in a note to clients on Friday. "Any hopes of a [50 basis point] cut are long gone."

On the one hand, life comes at you fast. A new report comes and blows everybody’s views out of the water and even threatens to pull the dreaded topic of inflation back in, just when we thought we were out.

On the other, to quote Fed Chair Powell from the June meeting, “it always makes sense to look at a series … rather than just one report.” The “totality” of data, not just one report — which of course will get more weight because it’s still warm from the printer, magnifying the effect of an already huge beat.

What is clear is that the Fed’s wait-and-see, meeting-by-meeting attitude is far from ready to be abandoned, as the moment’s uniqueness keeps showing itself.

Besides the unexpected headline numbers, the unemployment rate-focused Sahm Rule — which has already been played down by its creator, Claudia Sahm — showed an unusual retreat after previously surpassing a recessionary mark that, once passed, usually keeps going up. Another point for the “this time could be different” camp.

It doesn’t end there. Year-over-year wage growth was 4%, up from 3.9%, a gain that would typically spark serious inflation concerns, but hasn’t. Putting aside whether “not cutting” is perhaps tantamount to hiking, the fundamental narrative of the Fed’s directionality hasn’t changed, only adjusted.

Counterbalancing the jobs numbers is survey after survey that shows labor sentiment declining — a factor arguably as important as the actual numbers. (If people feel like jobs are scarce, they may also feel like spending a little more conservatively.)

“On the face of this the Fed should be hiking rates with these sorts of figures, not cutting rates,” wrote ING’s James Knightley. “Nonetheless, we feel that the risks remain skewed towards weaker growth and lower Fed funds given the perception amongst households of a deteriorating jobs market (even if today’s numbers don’t confirm that), which may lead to consumers spending more cautiously.”

For the Fed, at least, the wait-and-see approach looks even better than it did previously as it seeks to gently land the plane. With both the economy looking strong and inflation getting in check, nothing sits to force its hand — for now.

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