The robust pace of US jobs growth cooled in September but the unemployment rate unexpectedly dropped, firming expectations that the Federal Reserve will raise interest rates by another 0.75 percentage points at its next meeting in November.
The world’s largest economy added 263,000 positions last month, according to the Bureau of Labor Statistics, fewer than the 315,000 positions created in August and well below July’s 537,000 increase. So far in 2022, monthly jobs growth is averaging 420,000, down from the 562,000 average monthly pace in 2021.
Despite the slower pace of growth, the unemployment rate edged back down to its pre-pandemic low of 3.5 per cent as the share of Americans either employed or seeking a job declined slightly.
“The story is that a 0.75 percentage point hike in November is likely,” said Tiffany Wilding, North America economist at Pimco. “The Fed needs to continue to tighten.”
Officials at the US central bank are actively debating whether a fourth-consecutive jumbo rate rise is necessary next month or whether they can potentially downshift to raising rates in half-point increments. So far this year, the Fed has lifted its benchmark policy rate from near-zero to a range of 3 per cent to 3.25 per cent.
Traders in fed funds futures contracts have now priced in the odds of that the more aggressive outcome at 81 per cent, according to CME Group, up from 75 per cent prior to Friday’s release.
The data come just days after figures showed employers slashed more than 1mn job openings in August — one of the sharpest monthly declines in two decades. That pushed the ratio of job vacancies to unemployed people down from 2 to 1.7.
Workers are still quitting at a high rate, however, suggesting that labour supply and demand are still out of balance.
Futures for the S&P 500 tumbled to be 1.2 per cent lower in pre-market trading on Friday, having been about flat ahead of the data release. The yield on the two-year US Treasury, which is sensitive to changes in policy expectations, rose 0.06 percentage points to 4.31 per cent.
Officials at the US central bank have projected their efforts to tame the worst inflation in four decades will require not only a sustained period of “below-trend” growth, but also job losses. A recession cannot be ruled out, Fed chair Jay Powell recently warned.
According to the most recent projections published by the Fed last month, the median forecast among policymakers for the unemployment rate shows it rising to just 3.8 per cent by the end of the year before jumping in 2023 to 4.4 per cent and staying at that level until 2025.
Officials have maintained that inflation can be tamed without a more substantive rise in unemployment, not least because employers may be hesitant to cut their workforces given the magnitude of the labour shortage since the onset of the pandemic.
As of September, the so-called labour force participation rate still remained below its pre-pandemic level, at 62.3 per cent. The overall labour force shrank slightly by 57,000 people.
Leading the jobs gains was the leisure and hospitality industry, which added 83,000 positions, followed by a 60,000 increase in healthcare employment.
The persistently tight labour market — and the wage gains that have followed suit as companies try to attract new hires and retain old ones — is a top concern for the Fed, which is actively trying to restrain demand and reduce price pressures through supersized interest rate increases.
Average hourly earnings in September increased at the same 0.3 per cent rate as in the previous period, translating to an annual jump of 5 per cent.
By the end of the year, most officials forecast the federal funds rate to hover between 4.25 per cent and 4.5 per cent, with further rate rises in early 2023. The benchmark policy rate is expected to peak just above 4.5 per cent. They have also emphasised that the Fed is not yet considering any pause in its rate-rising cycle even as signs of stress begin to emerge in the financial system and the global economic outlook sours.