Slowdown in US Hiring Boosts Odds of Rate Hold in October

A U.S. labor market report released last Friday, which showed a larger-than-expected slowdown in hiring, has steered policymakers at the Federal Reserve (the U.S. central bank) away from proceeding with a second consecutive interest rate hike this month, aiming to allow time to study additional economic data before making any further decisions. However, this assessment could change following data that has yet to be released, particularly the consumer price index, closely monitored as a measure of inflation, which will be published ahead of the Fed’s policy meeting on October 27 and 28.

After raising interest rates by a quarter percentage point last month to put inflation on a faster path toward the Fed’s 2% target, U.S. central bank officials are now weighing the risks of moving too slowly to curb price pressures against the potential damage to the labor market if they move too quickly.

Federal Reserve Chair Jerome Powell has adhered to his policy of refraining from making any statements about the risks he sees or the path interest rates may need to take, but his colleagues have not been as restrained. In response to a question from Fox Business about whether the Fed should raise or hold interest rates at its next meeting, Chicago Fed President Austan Goolsbee said, “There is a wide range of options on the table,” adding that he believes the latest jobs data show the labor market is stable. He continued, “I think the inflation side of the Fed’s mandate is the source of the problem. We need to watch that closely.”

The Labor Department reported that U.S. employers added only 29,000 jobs last month, and August employment figures were revised downward.

After the Fed raised short-term borrowing costs last month, policymakers indicated they would likely proceed with at least one more rate hike by the end of the year if the Iran war and other shocks driving inflation higher persist.

With progress toward a ceasefire agreement still stalled and trade tensions remaining at the forefront of attention, expectations earlier this week pointed to a rapid series of interest rate hikes, coinciding with rising long-term bond yields, which hit a 24-year high on Thursday. Mortgage interest rates also rose above 7%.

However, Fed Vice Chair Philip Jefferson and New York Fed President John Williams, in statements this week, expressed their desire to see more data before considering any further action, prompting investors to reduce their bets on a rate hike during the central bank’s October meeting. An analysis of a CME Group FedWatch tool showed that investors expect a 25% probability of a rate hike in October and a very high probability of a hike in December.

Data released this week showed that inflation, according to the Fed’s preferred measure, stood at 3.4% in August—a rate far above the 2% target but below economists’ expectations.