A Federal Reserve interest-rate hike is back in focus after a much stronger-than-expected U.S. jobs report showed employers added nearly three times as many positions as forecast in August.
The data also showed a sharp increase in labor-force participation, adding to signs that the U.S. labor market remains resilient ahead of the Fed’s September 15-16 policy meeting.
US Jobs Report Easily Beats Forecasts
Nonfarm payrolls increased by 162,000 in August, according to the Bureau of Labor Statistics.
Economists had expected an increase of only around 56,000 jobs.
Labor-force participation also rose to 61.6%. The increase was driven partly by around 300,000 people moving directly from outside the labor force into employment.
At the same time, fewer workers and job seekers left the labor market.
Unemployment Rate Holds at 4.1%
Despite the strong rise in employment, the U.S. unemployment rate remained unchanged at 4.1%.
The steady rate was supported by more people entering or returning to the labor market.
That is potentially a positive signal because it suggests labor supply is expanding rather than unemployment staying low simply because fewer people are looking for work.
Black unemployment also improved significantly. The rate fell to 6% in August after reaching as high as 8% last autumn.
Wage Growth Remains Consistent With Inflation Target
Average hourly earnings increased by 3.1% from a year earlier.
That pace remained within a range generally viewed as more consistent with the Federal Reserve’s 2% inflation target.
Fed officials have repeatedly described the labor market as solid while also noting that wage growth does not currently appear to be creating major additional inflation pressure.
As a result, the strong jobs report may not be enough on its own to guarantee another rate hike.
Inflation Data Could Decide the Fed’s Next Move
Attention now turns to upcoming U.S. inflation data.
The next consumer price index report could play a major role in determining whether the Federal Reserve raises rates or keeps policy unchanged.
Pantheon Macroeconomics economists said the September Federal Open Market Committee meeting remains finely balanced.
They noted that Fed officials have consistently signaled that inflation will be the main factor guiding their next policy decision.
Warsh Keeps Inflation Risks in Focus
Markets had already increased bets on another Fed rate hike after Chairman Kevin Warsh delivered a cautious message at Jackson Hole.
Warsh said he was not convinced that the recent slowdown in inflation provided enough evidence that price pressures were fully under control.
He indicated that further progress would be needed before policymakers could be confident that current interest rates are restrictive enough to stabilize inflation.
Those comments pushed investors toward a more hawkish view of Federal Reserve policy.
Waller Signals Support for Holding Rates Steady
Other Fed officials have sounded more open to leaving interest rates unchanged.
Federal Reserve Governor Christopher Waller said he could support keeping rates in the 3.50%-3.75% range if upcoming inflation data continue to show easing price pressures.
The next round of data will include both the consumer price index and producer price index.
Waller had also suggested that a solid August jobs report would probably have limited influence on his view of the appropriate rate path.
Strong Labor Market Keeps Rate Hike Option Open
Capital Economics analysts argued that the strength of the August employment report makes it more difficult to justify keeping rates unchanged.
However, they also stressed that next week’s CPI and PPI reports remain more important for determining whether the Fed actually moves in September.
If inflation remains moderately above levels consistent with the Fed’s target, the combination of persistent price pressures and a strong labor market could strengthen the case for a rate hike.
Markets Raise September Fed Hike Odds
Traders increased their expectations for another rate increase after the jobs report.
Interest-rate futures implied roughly a 62% probability of a September hike, up from around 55% before the employment data was released.
The shift suggests markets see the latest jobs figures as giving the Federal Reserve more room to tighten policy if inflation remains stubborn.
Two More Fed Rate Hikes Could Come This Year
Nationwide Chief Economist Kathy Bostjancic said the strong employment report provides additional support for further rate increases this year.
Nationwide now expects two 25-basis-point hikes before the end of the year.
That would lift the federal funds rate to a range of 4% to 4.25%.
What Comes Next for the Federal Reserve?
The August jobs report has strengthened the case for keeping a September Fed rate hike under consideration.
However, inflation remains the key factor.
Strong employment gives policymakers greater flexibility to tighten policy, but moderate wage growth means the labor market itself may not be generating significant inflation pressure.
The upcoming CPI and PPI reports could therefore prove decisive in determining whether the Federal Reserve raises rates at its September meeting or chooses to remain on hold.
