U.S. jobs data could be the Fed’s cue to hike or hold

The latest U.S. employment report, set to be released on Friday, will provide crucial insight into the state of the labor market and will play a significant role in the Federal Reserve’s decision-making process regarding interest rate hikes. The report, which will be based on surveys conducted before the recent United Auto Workers strike, is expected to show a modest increase of 170,000 positions in September, slightly above the average of the last three months.

This data, combined with the unexpected surge in job openings in August, could leave the Federal Reserve in a dilemma, as the economy continues to surprise experts with its above-trend growth. Despite predictions of a slowdown later in the year, the economy has remained resilient, prompting some economists to argue for another interest rate hike. The Fed’s September meeting resulted in no changes to the target federal funds rate, with the next meeting scheduled for the end of October.

Nancy Vanden Houten, lead U.S. economist at Oxford Economics, stated that the Federal Reserve would likely want more evidence of cooling labor market conditions before considering another rate increase. While her projections suggest a slight drop in job growth from August, she believes that wage gains will be stronger in September. These indicators, along with other data since the August jobs report, suggest that the labor market is still relatively strong, despite some signs of cooling.

Throughout the year, the steady job growth and low unemployment rate have surprised many economists and policymakers who expected that the previous year and a half of rate hikes would have a more significant impact on demand, economic growth, and hiring. However, this summer marked the first signs of a cooling labor market, with average job gains declining from more than 330,000 in January to 150,000 from June to August.

Wage gains have also slowed down, indicating that the labor market is normalizing after the disruptions caused by the pandemic. Further analysis by Fed officials reveals that indicators such as quit rates and the number of jobs for each unemployed person have returned to near pre-pandemic levels. These observations provide additional confidence in the strength of the labor market.

In addition to labor market conditions, policymakers will also consider inflationary pressures and underlying economic factors when deciding whether to raise interest rates. Recent data suggests that underlying inflation is slowing even faster than predicted, which may influence the Fed’s outlook on rate hikes.

Overall, the upcoming employment report will provide significant insights into the labor market’s performance and help shape the Federal Reserve’s decision on whether to implement another rate increase this year. While economists and markets widely anticipate no further rate hikes, the strong labor market conditions and wage gains experienced in recent months could challenge this consensus.