Job growth in September confirms the Fed has a long way to go in the fight against inflation

The September jobs report provides both assurance that the job market remains strong and that the Federal Reserve will have to do more to slow the pace.

The 263,000 increase in nonfarm payrolls below analyst expectations and the slowest monthly gain in nearly a year and a half.

But a surprising drop in the unemployment rate and a hike in workers’ wages sent a clear message to markets that more massive rate hikes were on the way.

“Low unemployment used to feel so good,” said Ron Hetrick, senior economist at workforce data provider Lightcast. “But we’re getting into a situation where low unemployment is absolutely an important driver of our inflation.”

Indeed, average hourly earnings rose 5% year-on-year in September, down slightly from the 5.2% pace in August but still indicative of an economy where the cost of living is rising. strong. Hourly earnings rose 0.3% monthly, the same as in August.

Fed officials have pointed to a historically tight labor market as a byproduct of economic conditions. pushed the inflation index to near the highest level since the early 1980s. A series of central bank rate hikes aimed to reduce demand and thus relax the labor market where 1.7 jobs per worker remain. yes.

Friday’s nonfarm payrolls report only reinforces that the conditions behind inflation do exist.

For financial markets, that means it’s almost certain that the Fed will pass a fourth straight 0.75 percentage point hike when it meets again in early November. The final jobs report that policymakers will see ahead of the Federal Open Market Committee meeting on November 1-2.

Liz Ann Sonders, investment strategist at Charles Schwab, said: “Anyone looking for a reprieve that could give the Fed the green light to start telegraphing a pivot didn’t get that from the press. this report”. “Maybe the light becomes a little bluer so they can step back,” Sonders said.

In a speech on Thursday, Fed Governor Christopher Waller issued a warning that Friday’s report would not detract from his view on inflation.

“In my view, we have yet to make meaningful progress on inflation, and until that progress is both meaningful and persistent, I support continued rate hikes, along with a cut in the rate of inflation.” persistent decline in the Fed’s balance sheet, to help curb aggregate demand,” Waller said.

However, the market expects that November will likely be the last three-quarter point rate hike.

Futures pricing on Friday points to an 82% chance of a 0.75-point increase in November, then a 0.5-point gain in December, followed by another 0.25-point move in February. bringing lending rates to the 4.5% 4.75% range, according to CME Group data.

What concerns investors more than anything right now is whether the Fed can do all that without dragging the economy into a deep, protracted recession.

Investors, though, were worried enough about the prospect of a “break” that they sent the Dow Jones Industrial Average more than 500 points off at noon on Friday.

Wall Street commentary focused on the uncertainty of the way forward:

• From KPMG senior economist Ken Kim: “Normally, in most other economic cycles, we would be happy with such a solid report, especially from the labor market side. But this just speaks volumes about the upside-down world we’re into, because the strength of the jobless report keeps pressure on the Fed to keep raising their rates going forward. “
• Rick Rieder, BlackRock’s Global Head of Fixed Income Investments, joked about the Fed’s ban on resume software in an attempt to cool down job hunters: “The Fed should raise rates another 75 bps by next month, and the Fed should raise rates by another 75 bps by next month.” mix this into the next meeting…thus pressing on tighter financial conditions…We wonder if it really sees the resume software ban as a last-ditch effort to hit the target, but while that won’t happen, we wonder if, and when, a significant increase in unemployment will happen as well.”
• David Donabedian, Managing Director at CIBC Private Wealth: “We expect pressure on the Fed to remain high, with continued monetary tightening through 2023. The Fed is not tightening the screws on the economy. economy, creating persistent turbulence for the stock market.”
• Ron Temple, head of US equity at Lazard Asset Management: “While job growth is slowing, the US economy is still too hot for the Fed to hit its inflation target. Soft landings continue to become more difficult. Had there been pigeons left on the FOMC, today’s report could have dropped their rankings even further.”

The jobs data makes the third-quarter economic picture look stronger.

The Atlanta Fed GDPNow tracker put growth for the quarter at 2.9%, a bounce after the economy saw consecutive negative results in the first two quarters of the year, meeting the technical definition of a recession.

However, the Atlanta Fed Salary Tracker shows that workers’ wages grew at an annual rate of 6.9% through August, even faster than the Bureau of Labor Statistics figures. The Fed’s tracker uses Census data rather than BLS data to inform its calculations and is often watched more closely by central bank policymakers.

All of this makes the inflation war seem ongoing, even as payroll growth is slowing.

Citigroup economist Andrew Hollenhorst writes: “There is one interpretation of today’s data that supports a soft landing – job openings are falling and unemployment is low, but we continue to see results The most likely outcome is price inflation and persistently high wages. that the Fed would push the economy into at least a mild recession to bring down inflation. “