September jobs report could solidify another super-sized Fed rate hike

U.S. job growth softened in September for the second straight month, but hiring likely remained healthy enough for the Federal Reserve to approve another jumbo interest rate hike when it meets in November.

Employers added 263,000 jobs in September, the Labor Department said in its monthly payroll report released Friday, beating the 250,000 jobs forecast by Refinitiv economists. The unemployment rate, meanwhile, unexpectedly dropped to 3.5%, matching a five-decade low, from 3.7% the previous month. 

Average hourly earnings also continued to rise, climbing 0.3% in September, to $32.46 an hour. 

The report is the latest evidence of the continued strength of the labor market, despite headwinds from higher interest rates, inflation and growing fears of a global recession; it will almost certainly keep pressure on the Fed to maintain its aggressive rate hike trajectory as it tries to cool the economy and wrangle inflation under control. 

US JOB GROWTH SLOWS AGAIN IN SEPTEMBER WITH JUST 263,000 POSITIONS ADDED

"Clearly the labor market remains robust along with sustained stress on the Fed to stay hawkish," said Mike Loewengart, head of portfolio construction at Morgan Stanley Global Investment Office. "While job growth may finally be cooling off a bit from earlier this year, it remains strong amid rate hike pressure, especially considering the unemployment rate dropped."

While monthly jobs data is always important, the Federal Reserve was closely watching this particular report for signs the labor market is starting to slow down from its frenzied pace as policymakers try to wrestle inflation, which is still running near a 40-year high, back to 2%.

Policymakers already approved consecutive 75-basis-point interest rate hikes in June, July and September and have signaled that another increase of that magnitude is on the table in November, depending on the forthcoming economic data. 

THE FED'S WAR ON INFLATION COULD COST 1M JOBS

The Fed is hoping to see some significant softening in the extremely tight labor market, with updated economic projections revealing that policymakers expect unemployment to climb much higher over the next year. The forecasts show unemployment rising to 4.4% by the end of next year, up from the current rate of 3.7%. 

That is significantly higher than in June when policymakers saw the jobless rate inching up to 3.7% and could mean that at least 1 million Americans lose their jobs.

"We think we need to have softer labor market conditions," Chair Jerome Powell said last month. "And if we want to set ourselves up, really light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn't." 

Policymakers have stressed that they are carefully monitoring the jobs figures as they weigh how aggressive to be in hiking rates. 

Traders are already pricing in a nearly 85% chance of another 75-basis-point hike at the conclusion of the Fed's two-day meeting on Nov. 2, according to the CME Group's FedWatch tool, which tracks trading. Another 14%, however, think the Fed will go with a half-point hike instead.

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"Despite a slowing in the pace of hiring and a significant decline in job openings across the economy we still expect that Federal Reserve to increase the federal funds policy rate by 75 basis points at its November meeting," said Joe Brusuelas, RSM chief economist. "Federal Reserve policymakers will almost certainly need to observe a series of monthly job reports with topline change in total employment around 100,000 per month to even consider a pivot."