The robust pace of US job growth slowed in September, but the unemployment rate fell unexpectedly, confirming expectations that the US Federal Reserve will hike interest rates by another 0.75 percentage point at its next meeting in November.
According to the Bureau of Labor Statistics, the world’s largest economy added 263,000 jobs last month, down from the 315,000 jobs added in August and significantly less than July’s 537,000 increase. So far, monthly job growth in 2022 averages 420,000 versus the average monthly pace of 562,000 in 2021.
Despite the slower pace of growth, the unemployment rate fell back to its pre-pandemic low of 3.5 percent as the percentage of Americans either employed or looking for a job fell slightly.
“History is that a 0.75 percentage point hike in November is likely,” said Tiffany Wilding, North America economist at Pimco. “The Fed needs to tighten further.”
Federal Reserve officials are actively debating whether a fourth straight jumbo rate hike is needed next month or whether they can potentially switch to a half-point rate hike increments. So far this year, the Fed has raised interest rates from near zero to a range of 3 percent to 3.25 percent.
The debate hinges on how resilient the US economy remains and whether inflation gradually returns to the Fed’s 2% target.
Friday’s report underscored that the job market remains fairly strong, despite recent signs that employers are beginning to cut hiring.
Earlier this week, new data showed companies shed more than 1 million jobs in August — one of the sharpest monthly declines in two decades. As a result, the ratio of vacancies to unemployed fell from 2 to 1.7.
However, workers are still quitting at high rates, suggesting that labor supply and demand are still out of balance.
Traders of Fed fund futures contracts on Friday priced in the probability of a 0.75 percentage point rate hike next month at 82 percent, up from 75 percent prior to the last jobs report, according to CME Group.
The S&P 500 slid 2.2 percent in early Wall Street trading on Friday, after being roughly flat before the data release. The US two-year Treasury yield, which is sensitive to changes in policy expectations, rose 0.06 percentage point to 4.31 percent.
According to Alex Veroude, chief investment officer for fixed income at Insight Investment, Friday’s data further reinforces that a Fed “pivot” is not imminent anytime soon.
Officials this week insisted they are not considering any kind of pause or scaling back of their tightening plans just yet, even as signs of stress emerge in the financial system and the global economic outlook worsens.
Worryingly, the labor market is still hampered by labor shortages. In September, the so-called labor force participation rate was 62.3 percent, still below its pre-pandemic level. The total number of employed persons also shrank by 57,000 people.
Leading the job gains was the leisure and hospitality industry, which added 83,000 jobs, followed by a 60,000 rise in healthcare employment. More jobs were also created in construction and manufacturing, while the number of jobs in transport declined.
The average hourly wage rose in September at the same rate of 0.3 percent as in the previous period, representing a 5 percent annual jump.
The persistently tight labor market — and the wage increases that have followed as companies try to attract new workers and retain old ones — is a key concern for the Fed, which is actively trying to dampen demand and ease price pressures through outsized rate hikes.
By the end of the year, most officials are forecasting the federal funds rate to fluctuate between 4.25 percent and 4.5 percent, with further rate hikes in early 2023. The federal funds rate is expected to peak at just over 4.5 percent.
Officials predict their efforts to tame the worst inflation in four decades will require not only a prolonged period of “below trend” growth but also job losses. Fed Chairman Jay Powell recently warned that a recession cannot be ruled out.
According to the latest forecasts released by the Fed last month, policymakers’ median forecast for the unemployment rate shows it will rise to just 3.8 percent by the end of the year, before skyrocketing to 4.4 percent in 2023 and through 2025 will remain at this level.
Officials have claimed that inflation can be tamed without a more pronounced rise in unemployment, not least because employers may be reluctant to downsize their workforces given the extent of labor shortages since the pandemic began.