Updated from Oct. 4

The government's September employment report came in roughly as economists expected, showing a gain of 110,000 nonfarm jobs.

The U.S. also revised August's payroll data to show a gain that month of 89,000 jobs, rather than the 4,000-job loss that shocked markets and fed expectations of a Fed rate cut.

When the government said last month that the economy lost 4,000 jobs in August, the Federal Reserve heaved a massive sigh of relief. The unexpected contraction gave the Fed cover to cut interest rates at its Sept. 18 meeting.

With the report on the September employment situation due Friday morning, there's an assumption in the market that another weak number will mean another cut. But this time around, it's not clear that that's what investors want.

A rate cut, in some eyes, would amount to additional dollars dropped from Helicopter Ben. More liquidity in the system would surely be helpful to troubled financial firms that suffered in the summer's credit crunch, such as Bear Stearns ( BSC), Lehman Brothers ( LEH) and Merrill Lynch ( MER).

But a weak number would also increase the chances that a recession is ahead -- which would be bearish for stocks that benefit from more business spending, such as technology stocks. Retailers would also fare better if the economy shows clear signs of strength, as they're unlikely to hold up if the consumer further retrenches.

Regardless, observers agree that the Fed will be watching the numbers closely.

"This is the most important jobs report we've had in some time," says Joe Brusuelas, chief economist at IDEAglobal. "I believe the market will view this report as an event that will get the Fed to move or not," says James Bianco, president of Bianco Research.

Analysts predict the U.S. added 100,000 new jobs in September. Economists on the whole expect that August's negative number will be revised higher, but that the benchmark revisions for the year will reveal a net reduction of 200,000 to 400,000 jobs from the current tallies.

The fed funds futures market is betting on more cuts. Traders there put 72% odds of a 25-basis-point rate cut at the Oct. 31 meeting of the Federal Open Market Committee, according to Miller Tabak. It puts 100% odds of a cut at the following Dec. 11 meeting and 40% odds on a 50-basis-point cut at that meeting.

By cutting rates absent job losses last month, the central bank would have created a credibility problem for itself, says Jim Paulsen, chief investment strategist at Wells Capital Management. The about-face after a year of jawboning about inflation would have been more jarring.

The same conundrum is in play now. Recent data on the economy suggest the summer's credit crunch has not drastically slowed growth. The Institute for Supply Management's reports on both manufacturing and service sector growth are not contracting. Factory orders were weak, but personal income and spending, productivity and industrial capacity utilization rates remain consistent with moderate economic growth -- not an economy in desperate need of more liquidity. Indeed, several economists have increased their third-quarter estimates in recent weeks, bringing GDP growth in the quarter to over 2%.

Recent Fed speakers have warned the markets not to bet on much more easing, though they left the door open if incoming data reveal unexpected weakness in the economy. St. Louis Fed President William Poole last Friday even highlighted employment as the key factor.

"If the market upset were to deepen in a sustained way, it might have serious consequences for employment stability," said Poole. But he added that "it would be a mistake to bake in the cake more rate cuts. We will go meeting by meeting."
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.