Blowout US job growth defies Fed’s cooldown narrative

U.S. employers in September turned their back on Federal Reserve officials who said the job market was beginning to cool, adding 336,000 positions in a return to the fevered hiring seen during the coronavirus pandemic and potentially bolstering the case for another interest rate increase.

Upward revisions to the July and August job totals showed stronger hiring as well, to the tune of 119,000 additional jobs, enough to turn what had seemed a slowdown in hiring into a potential headache for the U.S. central bank.

Investors in contracts tied to the benchmark federal funds rate boosted bets that the Fed will lift it by another quarter of a percentage point to the 5.50%-5.75% range by the end of this year.

Bond markets continued raising the interest rates on long-term U.S. Treasury securities as well, with the yield on the 30-year bond jumping 10 basis points after the release of the jobs data and holding above 5% – a level not seen since before the 2007-2009 financial crisis.

Indeed, the recent action in bond markets, coupled with signs the job market is still hot, show the sensitive moment the Fed and the economy may be approaching. Fast rises in long-term borrowing rates, and the shifting relationship between short- and long-term yields, have often been precursors to recession as financing costs rise more than expected for businesses and households and spending and investment are depressed.

Wage gains last month were temperate. Average hourly earnings increased just 0.2% on a month-to-month basis, unchanged from August, and by 4.2% on a year-over-year basis, which was slightly lower than the prior month.

The acceleration may not on its own be enough to seal the case for a rate increase at the Fed’s Oct. 31-Nov. 1 policy meeting, said Thomas Simons, a senior economist at Jefferies, but it will put a premium on upcoming inflation data to see if there are continued signs of slowing there or not.

“Payroll growth was impressive in September, but the underlying details are not as robust. Wage growth has downshifted,” Simons said. “We do not think that this is going to sway the Fed towards a rate hike on Nov. 1, but the inflation data next week could push the scales.”

Still, economists polled by Reuters had expected job growth of only 170,000 positions in September. The breadth of hiring also countered arguments made recently by some Fed officials that job gains had become so narrowly focused on the healthcare and social assistance sector that the rest of the economy seemed weak.

The big gainer in September was the leisure and hospitality industry, which added 96,000 jobs, about 50% higher than the industry’s monthly average for the past year.

‘MORE EVIDENCE’

Coupled with an unexpected jump in job openings in August, the jobs report provided the sort of outcome that could at least leave the immediate policy debate unresolved, if not shift sentiment toward higher rates given an economy that continues to surprise with above-trend growth.

The Fed held its benchmark overnight interest rate steady rate in the 5.25%-5.50% at its policy meeting last month. It will meet two more times in 2023.

“We think the Fed would like to see a bit more evidence of cooling labor market conditions than we expect” before backing away from further hikes, Nancy Vanden Houten, lead U.S. economist at Oxford Economics, wrote earlier this week, an outlook premised on her expectation the economy would add just 180,000 jobs in September.

“Data since the August jobs report are consistent with a labor market that is still relatively strong,” she said, enough so that the “the risk is still for an additional hike” even if the broad market expectation is that the Fed will not raise rates any further.

The steady job growth and persistently low unemployment rate this year has surprised many economists and policymakers who expected the fast rate hikes since March of 2022 would have done more to slow demand, economic growth and hiring.

Fed officials delving into the details thought they were seeing a cooldown take shape – with quit rates, for example, returning nearly to pre-pandemic levels and the number of jobs for each unemployed person falling sharply.

Data since the Fed’s September meeting also showed underlying inflation slowing even faster than policymakers anticipated when they issued economic projections last month that continued to see another quarter-percentage-point rate hike needed by the end of the year.

The September data may force a reevaluation.
Source: Reuters