The relative strength of Friday's jobs report has increased the likelihood that Federal Reserve officials will continue a path of aggressive monetary tightening that has already brought their benchmark short-term interest rate to the highest level since 2008.
The U.S. economy added 263,000 jobs in September as the unemployment rate fell to 3.5%, the Labor Department said Friday. Although hiring slowed last month, the labor market remained strong, with payrolls again rising more than Wall Street expected.
The Fed raised rates in recent months with the goal of cooling the job market, which would give Americans less spending power and ideally bring down decades-high inflation. That hasn't happened yet. Friday’s data was a case of bad-good news, as investors worried labor market strength might spur higher rates.
“While job growth is slowing, the U.S. economy remains far too hot for the Fed to achieve its inflation target," Ron Temple, head of U.S. equity, Lazard Asset Management, wrote after the report. "The path to a soft landing keeps getting more challenging. If there are any doves left on the FOMC [Federal Market Open Committee], today’s report might have further thinned their ranks.”
Despite the monthly decline in job growth, unemployment slipped to another historic low, and the labor force participation rate ticked down to 62.3% from 62.4% the prior month. Average hourly earnings, a closely watched part of the report, increased 0.3% over the month, while slipping only slightly on an annual basis to a still-robust 5.0%.
Wall Street reactions to the data rushed into our inboxes following Friday’s release. Yahoo Finance compiled some of the takes below:
Ian Shepherdson, Chief Economist, Pantheon Macroeconomics
“The participation rate dipped by a statistically insignificant 0.06% to 62.3%, following a statistically significant 0.26% increase in August; the trend is rising, but still well below the pre-COVID peak. The household data are meaningless month-to-month, but that doesn’t stop the Fed looking at the data and discussing them as though they mean something. And with Chair Powell now just as obsessed with the labor market as with the current inflation data, this report just about nails-on a 75-basis-point hike next month. Things might look different by December.”
Rusty Vanneman, Chief Investment Strategist, Orion Advisor Solutions
“While payroll growth was slower than expected, this morning’s jobs report resulted in a minor reduction in the unemployment rate to 3.5%. We see this as a negative sign for the health of the U.S. stock market. With the Federal Reserve working to tame historically high inflation, we were hoping to begin seeing a more drastic slowdown in the labor market as a positive sign that Fed tightening is producing its intended effect. While the labor supply and demand remain in this state, combined with high inflation, the Federal Reserve will continue to be forced to tighten until the economy snaps off its current momentum.”
Gregory Daco, Chief Economist, EY Partheon
“The decline in the unemployment rate to its 50-year low of 3.5% is symptomatic of the increased value of talent post-pandemic. And, with the labor force participation rate disappointingly falling 0.1% to 62.3%, a tight labor market with insufficient labor supply means executives are managing their workforce strategically rather than adopting an indiscriminate cost-cutting approach. Easing wage growth is a welcome development, but to anyone that believes this entails an imminent Fed pivot, policymakers had one message this week, ‘not so fast.’”
Mark Hamrick, Senior Economic Analyst, Bankrate
"There continues to be a mismatch between the number of job openings, 10.1 million at last count, and the new number of unemployed at 5.8 million. To that end, we still need more labor force participation. At the same time, wage growth rising 5% over the past year continues to fail to keep pace with inflation. The Federal Reserve looks at this and other job market data, along with still hot inflation pressures, and will continue to believe it needs to boost interest rates.”
Seema Shah, Chief Global Strategist, Principal Global Investors
“Today’s job number is a hawkish reading, with almost all the elements of the report moving in the wrong direction for the Fed. Payrolls were broadly in line with expectations but, importantly in this good news is bad news, period: markets were hoping for a downside surprise today. Instead, the number only confirms that the Fed needs to hike rates by a fourth consecutive 0.75% in November. With the Fed’s dot plot pointing to policy rates closer to 5% than 4% next year, we have a market that is wishing for the economy to slow quickly. That’s when you know there is only one path ahead: risk assets have further to fall.”
Russell Evans, Chief Investment Officer, Avitas Wealth Management
“One month of slowing job growth is likely not enough for the Fed to make any drastic changes to its policy and we would need to see several months of a weakening employment picture in order for the Fed to act. The Fed is very focused on inflation and that may mean that jobs are collateral damage.”
Christopher Rupkey, Chief Economist, FWDBONDS
“The labor market isn’t just rolling along, it’s a virtual steam-roller that does nothing to slow economic demand and help the Federal Reserve in its inflation fight. The Fed will certainly not stand down, or pivot, or pause or anything else because this economy isn’t slowing down. The first half, negative GDP growth be damned, this labor market is on fire. We fully expect the Federal Reserve to meet their latest forecast with a 75 basis point rate hike in November followed by a 50 basis point rate hike in December to finish the year at 4.5%. Labor market, take that.”
Becky Frankiewicz, President and Chief Commercial Officer, ManpowerGroup
“We’re seeing weaker workforce participation; it’s still a worker’s market. We saw gains in leisure & hospitality, health care, and professional & business services. Looking ahead, holiday hiring is the weathervane, and we are seeing early signs of what we call a ‘hybrid holiday’ for seasonal work, with an increased need for traditional in-store retail jobs as well as delivering goods and remote roles in customer service.”
Mike Loewengart, Head of Model Portfolio Construction, Morgan Stanley Global Investment Office
“Clearly the labor market remains robust along with sustained stress on the Fed to stay hawkish. 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. The market’s negative reaction may be a sign that investors are processing the likelihood that there will be no change in the Fed’s aggressive playbook in the near term. Keep in mind the next Fed decision isn’t until early November so much more data will need to be digested, not the least of which is next week’s inflation gauge.”
Cliff Hodge, Chief Investment Officer, Cornerstone Wealth
“There continues to be a labor supply problem, with the participation rate moving the wrong direction and dragging the unemployment rate lower for the wrong reasons. We are going to remain in an environment where good news for the economy is bad news for markets. The one silver lining from the report is on the wage front. Average hourly earnings continued to moderate month over month, which may help future inflation readings, but does nothing for the market today.”
Peter Essele, Head of Portfolio Management, Commonwealth Financial Network
“Along with the Jolts jobs openings and ADP numbers from earlier in the week, today’s release is affirmation that the job market has slowed a bit as of late. Despite the slowdown, wage growth remains at 5%, which signals a green light to the Fed that pricing pressures persist in the labor market. Bond investors took note, with the 1-year Treasury bill moving higher by 28 basis points following the release. Volatility is going to persist in equity and fixed income markets until there’s a clear indication that inflation is under control.”
Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance
“Good news for the economy is bad news for markets, unfortunately. Today’s unemployment number dropping to 3.5% would normally be celebrated — and it is good news for workers and demonstrates the strength of the job market — but in today’s world, with a Federal Reserve laser focused on inflation, a stronger labor market is unlikely to lead to lower purchases and lower inflation.”
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc