Cooling US Job Market Gives Fed Room to Pause Rate Hikes for Now

(Bloomberg) -- A cooling US job market gives the Federal Reserve room to pause interest-rate increases this month while keeping options open for another rate hike later in the year.

Nonfarm payrolls rose 187,000 after the prior two months were revised significantly lower, a Bureau of Labor Statistics report showed Friday. The unemployment rate rose to 3.8%, partly reflecting a pickup in labor-force participation, and average hourly earnings rose just 0.2%, marking the most tepid increase since February 2022.

“The labor market continues a trend of gradual cooling, just like the Fed seeks,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics. “We are seeing negative revisions to previous months, slightly lighter wage growth, and still-rising participation. A September hike hasn't been the base case, and this only rules it out more.”

Fed Chair Jerome Powell said last week at the Kansas City Fed's conference in Jackson Hole, Wyoming, that inflation remained too high, and central bankers were prepared to tighten more if necessary. The Fed raised its benchmark rate in July to a range of 5.25% to 5.5%, a 22-year high, and their most recent projections had one more rate increase penciled in for 2023.

Investors increasingly doubt the second hike will happen. They see the Fed leaving rates unchanged at its Sept. 19-20 policy meeting, and are putting less-than-even odds on a hike in November, according to futures.

Participation Rises

Central bankers are likely to welcome Friday's news that more people are entering the labor force, which may help soften wage pressures. The overall participation rate — the share of the population that is working or looking for work — rose for the first time since March, to 62.8%. That marked the highest level since February 2020.

“The Fed is seeing a supply-side response, with a stronger labor market pulling people in,” said Brett Ryan, a senior US economist at Deutsche Bank AG. But “the Fed is still likely to kind of keep that threat of another hike out there,” he said.

Fed officials have highlighted the concern that economic growth could be accelerating in the current quarter, which they fear would lead to additional upward pressure on wages and prices. Growth in the quarter is currently tracking at 5.6%, according to an Atlanta Fed estimate published Aug. 31.

Cleveland Fed President Loretta Mester, speaking after Friday's report, said the central bank's actions are helping the labor market come into better balance, though employment remains strong.

“Future policy decisions will be about managing the risks and the intertemporal costs of over-tightening versus under-tightening monetary policy,” Mester said. 

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.