- A sharp slowdown in US hiring and a rise in unemployment have reduced market expectations for another Federal Reserve rate increase this month, although inflation remains a key factor.
Federal Reserve policymakers have more reason to hold interest rates steady at their October meeting after US employers added far fewer jobs than expected in September and the unemployment rate increased.
US employers added 29,000 jobs in September, well below the 90,000 increase economists polled by Reuters had expected. August payroll growth was also revised lower, while the unemployment rate rose to 4.2% from 4.1%.
The weaker labor-market report has sharply reduced expectations for an October rate increase. Interest-rate futures were pricing in less than a 20% chance of a hike at the Fed's October meeting, down from more than 25% before the employment data.
The data follow the Fed's quarter-point rate increase in September, which was aimed at bringing inflation back toward the central bank's 2% target.
Weak Hiring Changes the October Rate Outlook
The September payroll report showed that hiring has slowed considerably. August's increase was revised to 133,000 from the previously reported 162,000. July was revised to show a loss of 10,000 jobs, meaning the combined payroll count for July and August was 60,000 lower than previously estimated.
Healthcare remained the largest source of job growth, adding 17,000 positions, although that was substantially below its average monthly increase of 33,000 over the previous year. Construction added jobs as well, while employment in nursing and residential care facilities declined.
Economists cited by Reuters said some of September's weakness may reflect seasonal adjustment factors because Labor Day fell relatively late in the month. There also has not been a broad increase in layoffs, with initial unemployment claims remaining historically low.
That leaves the labor market in what economists describe as a low-hire, low-fire environment: companies are adding relatively few workers but are not broadly cutting jobs. The combination of weaker hiring, higher unemployment and downward payroll revisions nevertheless gives Fed officials less reason to raise rates immediately.
Inflation Remains Critical for the Fed
A weaker labor market does not automatically rule out another rate increase later in the year. Reuters reported that policymakers had previously indicated another increase could come before year-end if inflation pressures remain elevated, particularly if higher energy prices and other effects connected to the Iran war persist while the labor market remains resilient.
Federal Reserve officials had already signaled caution before Friday's jobs report. New York Fed President John Williams said there was no need for urgency in adjusting monetary policy, while Fed Vice Chair Philip Jefferson said officials needed more time to assess economic trends and risks.
Markets have therefore shifted away from an October hike without completely removing the possibility of another increase later in the year. Futures still reflected nearly a 90% probability of a December hike after Friday's employment report, although that expectation had also eased.
For investors, the next major test will be inflation. The employment report gives the Fed more evidence that labor-market conditions are cooling, but policymakers still need to determine whether price pressures are moving sufficiently toward the 2% target before deciding how long interest rates should remain restrictive.