U.S. job growth in August was three times higher than expected. What will the Fed decide?

In August, 162,000 non-farm jobs were created in the U.S., according to the U.S. Bureau of Labor Statistics (BLS). Following a relatively weak July, the total number of jobs rose sharply in August. The unemployment rate stood at 4.1%.

The data exceeded all of Wall Street’s expectations, where forecasts varied widely this time around. The consensus forecast among analysts surveyed by FactSet called for 65,000 new jobs in August and an unemployment rate rising to 4.2%, according to Barron’s. Dow Jones estimates, as reported by CNBC, were even more conservative: an increase of 53,000 jobs with the unemployment rate at 4.1%.

The BLS also revised its job growth figures for June and July upward. Taking these changes into account, the labor market added a total of 55,000 new jobs during this period, and last month, according to the updated data, instead of an unexpected decline, the U.S. labor market actually saw an increase of 21,000 jobs.

The August labor market report—the latest U.S. employment data ahead of the Federal Reserve’s (Fed) September meeting, notes The Wall Street Journal. Prior to its release, traders estimated the probability of a rate hike at the regulator’s next meeting at 52.4%. Following the release of the new macroeconomic data, those estimates rose to 61%, according to Bloomberg.

Stronger-than-expected job growth in August has left the Fed with fewer reasons not to raise rates this month, notes Bloomberg. Against this backdrop, futures for two of the three major U.S. stock indices fell following the BLS release: contracts for the S&P 500 and the Dow Jones are down 0.18% and 0.25%, respectively; while Nasdaq 100 futures—though their gains have slowed—are still up 0.13%. Treasury yields have begun to rise again. Yields on 10-year Treasuries jumped 3 basis points to 4.795%, while yields on 2-year Treasuries rose 6 basis points to 4.402%.

The labor market report is one of the two major macroeconomic releases ahead of the upcoming September Fed meeting. Last week, Fed Chair Kevin Warsh delivered a speech at a symposium in Jackson Hole that some analysts interpreted as “hawkish, ” Barron’s notes. The Fed chair made it clear at the time that the central bank would continue to fight inflation, noting that summer data “do not indicate a significant improvement in underlying trends.” At the same time, Warsh described the labor market as “quite stable,” hinting that employment could withstand higher interest rates if necessary.

The markets interpreted Warsh’s comments as a clear signal that rates would rise. A few days before the release of the August labor market report, according to CME FedWatch, traders estimated the probability of a rate hike at the next Fed meeting at more than 60%, although some analysts described the odds as a “coin toss,” Barron’s notes.

The Fed will make a final decision on the future course of monetary policy after assessing inflationary pressures. Consumer Price Index (CPI) data will be released next week, on September 11, ahead of the Fed’s meeting on September 16. For now, inflation remains above the Fed’s 2% target, which limits the U.S. central bank’s room to maneuver, according to Barron’s.

"It's hard to imagine that, after such strong data and upward revisions to previous figures, the market wouldn't start pricing in a rate hike in September," said Ira Jersey, a U.S. interest rate strategist at Bloomberg Intelligence.

“Today’s weaker [labor market] data could have given the Fed some room to maneuver following a perfectly acceptable core CPI reading [for July], but that clearly did not happen. Therefore, advocates of a more accommodative policy still need data confirming a slowdown in inflation to justify another pause [in rate hikes]. According to our estimates, for this to happen, core inflation [in August] would need to come in at around 0.2%. "If that doesn’t happen, the Fed will most likely raise rates in September," says Christopher Hodge of Natixis (as quoted by Bloomberg).

However, not everyone on Wall Street agrees with this view: “This is definitely a strong report that gives the Fed every reason to continue asserting that the labor market is stable and the economy remains at full employment,” noted Olu Sonola, head of U.S. economics at Fitch Ratings. “The Fed may want the markets to ‘watch the ball, not the referee.’ But strong CPI data next week could be the whistle that prompts a rate hike,” he warned.

This article was AI-translated and verified by a human editor