U.S. Hiring Bolsters the Case for Another Fed Rate Hike

U.S. employment unexpectedly surged in September, illustrating a durable labor market and bolstering the case for another Federal Reserve interest rate hike.

Nonfarm payrolls increased by 336,000 last month—the most since the start of the year—after sizable upward revisions to the prior two months, a Bureau of Labor Statistics (BLS) report showed Friday. The unemployment rate held at 3.8 percent, and wages rose at a modest pace.

Treasuries fell, extending a selloff in government securities that has rapidly pushed up yields over the past month and threatens to undercut the economy by driving up borrowing costs. Traders boosted bets on a Fed hike by year-end, while the S&P 500 opened lower and the dollar strengthened.

“This is a blowout report, and it’ll have people thinking that the Fed may pull the trigger on another hike before year-end, the selloff in rates be damned,” Omair Sharif, president and founder of Inflation Insights LLC, said in a note to clients.

The surprising vigor of the job market suggests that companies remain confident about their sales prospects. While the pace of hiring has cooled since last year, its resilience remains a key source of strength for household spending and the broader economy.

For the Fed, however, the labor market’s strength threatens to hinder progress on curbing inflation. The government figures, along with other data like the recent pickup in job openings, adds to the case for central bank officials to raise interest rates—already at a 22-year high—by another quarter percentage point this year.

Hiring was relatively broad-based, led by increases in leisure and hospitality, healthcare, and professional and business services. Government payrolls also rose.

Average hourly earnings increased 0.2 percent last month and were up 4.2 percent from a year earlier, the smallest annual advance since mid-2021. Earnings for nonsupervisory employees, who make up the majority of workers, posted the smallest back-to-back monthly increases since 2020.

What Bloomberg Economists Say…

“The knee-jerk reaction to September’s surprisingly hot nonfarm payroll [report] is that the Fed may have to hike more—but the details favor another interpretation. Household employment is weak, and the soft increase in wages and flat hours worked suggest labor-market conditions are not quite so rosy.”

— Anna Wong, Stuart Paul & Eliza Winger

The mismatch between labor supply and demand is coming into better balance in part due to an improvement in participation in recent months. That said, the participation rate—the share of the population that is working or looking for work—held steady last month.

Historically, September payroll figures can be a tad quirky, given the need for the BLS to adjust for end-of-summer layoffs in the leisure and hospitality sector and a surge in hiring related to the start of the new school year.

The jobs report is compiled from two separate surveys. The survey of businesses and government agencies—which produces the payrolls and wage data—illustrated surprisingly robust job growth. However, the poll of households, which is used to calculate the unemployment rate, showed employment rose a much more modest 86,000 during the month.

While Friday’s report had little notable drag from the recent proliferation of strikes, that will likely change with the October employment report. Most notably, payrolls are expected to take a hit from the United Auto Workers’ (UAW’s) unprecedented strike against the legacy Detroit car makers.

—With assistance from Augusta Saraiva, Chris Middleton,  Steve Matthews & Liz Capo McCormick.

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