Jobs are heating up even as the Fed looks to cool down

Federal Reserve officials are likely to watch cautiously the September jobs data, which showed that employers hired more quickly last month and added more workers in the previous two months than previously reported.

Employers added 336,000 jobs last month, sharply more than economists’ expectations of 170,000 jobs. Fed officials are watching the labor market carefully as they try to assess how much they need to raise interest rates to control inflation, and how long borrowing costs should remain high.

This pace of hiring is likely to be fast enough to keep Fed officials considering another rate increase. Central bankers have already raised interest rates to a range of 5.25 to 5.5 percent, and have suggested they may take another rate step in 2023 before keeping borrowing costs at a high level throughout 2024.

Fed policymakers have been encouraged that hiring has slowed recently – and that trend now appears much less certain. Although officials usually embrace signals that the labor market is strong, they fear that inflation will be difficult to completely eliminate if the economy maintains too much momentum.

The Fed’s next meeting is on October 31 to November 1, so policymakers will not receive another employment report before they have to make their next interest rate decision.

But the report contains some evidence that the economy is boiling beneath the surface. Federal Reserve policymakers have been closely monitoring signs that wage growth is slowing, and data showed wages grew at only a modest pace in September. Furthermore, some economists said a number of key developments could slow growth this fall.

Among them, long-term interest rates in financial markets have risen sharply in recent weeks, which will make financing the purchase of a car or home more expensive for consumers and expanding companies. This may prevent the Fed from being too quick to respond to the strong labor market.

“Independent of that, the economic data will likely justify the Fed raising interest rates at the November meeting – what gives me pause for thought is the fact that long-term yields have increased so significantly,” said Blerina Orochi, chief US economist at T. Rowe Price. “They will have to weigh the extent to which the recent rise in yields and tightening financial conditions has fulfilled this mission for them.”

The jobs report initially made Wall Street investors worry that the Fed might raise interest rates further, which would weigh on corporate earnings and stock valuations. The S&P 500 stock index fell immediately after the report, and the yield on the 10-year Treasury note, a benchmark interest rate around the world, initially rose.

But stocks rebounded and yields fell throughout the day — suggesting Wall Street became less concerned as it took in the totality of the data.

Some of that relief may have come from the news on wages, which suggests the economy is neither overheating nor cracking. Average hourly earnings rose 4.2% from the previous year, the smallest increase since June 2021.

Unemployment is also in line with what the Fed was expecting. Officials continued to expect that unemployment will likely rise slightly as the economy slows to about 4.1 percent, which would still be low by historical standards. The rate was 3.8 percent as of September, up slightly from 3.4 percent earlier this year.

Although September hiring was strong, there are speed bumps ahead for the economy. The recent increase in mortgage rates and other borrowing costs is likely to put pressure on growth as the economy faces other challenges — including the resumption of student loan payments, strikes at automakers and other industries, and dwindling consumer savings.

“A strike by auto union workers will weigh on job growth in October, while easing consumer spending and more cautious business activity will slow labor demand,” Gregory Daco, chief economist at EY-Parthenon, wrote in a note following the report.

Central bankers will receive a new CPI reading in October. 12 before their next meeting. If they decide to leave interest rates unchanged at the next meeting, they will have one last chance to adjust them this year when they meet in December. 12-13.

Joe Rennison Contributed to reports.