U.S. employers continued to hire at a solid pace last month and the jobless rate unexpectedly returned to a historic low, indicating a sturdy labor market that puts the inflation-focused Federal Reserve on course for another outsize interest-rate hike.
Nonfarm payrolls increased 263,000 in September after a 315,000 gain in August, a Labor Department report showed Friday. The unemployment rate unexpectedly dropped to 3.5%, matching a five-decade low. Average hourly earnings rose firmly.
The median estimates in a Bloomberg survey of economists called for a 255,000 advance in payrolls and for the unemployment rate to hold at 3.7%. Hiring was relatively broad based, led by gains in leisure and hospitality and health care.
The figures are the latest illustration of the perennial strength of the U.S. job market. While there have been some indications of moderating labor demand — most notably a recent decline in job openings — employers, many still short-staffed, continue to hire at a solid pace. That strength is not only underpinning consumer spending but also fueling wage growth as businesses compete for a limited pool of workers.
The Fed, meanwhile, is hoping to see a significant softening in labor market conditions, with the goal of cooling wage growth and ultimately inflation. While the payrolls advance was the smallest since April 2021, policy makers are watching to see if their rate hikes spur an increase in the unemployment rate.
This is the last jobs report Fed officials will have in hand before their November policy meeting as they consider a fourth-straight 75-basis point interest-rate hike. Fresh inflation data out next week will also play a fundamental role in their decision making. The report is projected to show the depth and breadth of the Fed’s inflation problem, with a key gauge of consumer prices potentially worsening.
Stock futures fell and Treasury yields rose as the strong report reaffirmed bets that the central bank will continue to be aggressive with its tightening campaign. Odds of a 75-basis point hike increased to a near certainty following the report.
The labor force participation rate — the share of the population that is working or looking for work — eased to 62.3%.
The jobs report showed average hourly earnings were up 0.3% from August and up 5% from a year earlier, a slight deceleration from the prior month but still historically elevated. The solid increase suggests the Fed will have to continue to raise interest rates as it aims to rein in rapid wage growth that has bolstered household spending.
Central bank officials have been clear recently about their commitment to taming inflation, even if that leads to higher unemployment and recession, because they say that failing to do so would be worse for Americans. Fed Chair Jerome Powell said last month that slower growth and a softer labor market are painful for the public, but that there isn’t a “painless” way to get inflation down.
