The Fed will look at the big picture–including the fact that rates have already increased so much recently–when considering a November rate hike.
At first glance, this jobs report blew expectations out of the water. The survey of businesses showed a payroll employment increase of 336,000 jobs in September, roughly twice what was expected. On top of that, revisions to July and August estimates were revised up by a combined 119,000 jobs.
However, the survey of households showed that the unemployment rate rate held steady at 3.8% as the number of people in the labor force looking for employment remained high. This had ticked up 0.3 percentage points last month; that gain held instead of dialing back as expected. Furthermore, wage growth continued to slow with average hourly earnings increasing 0.2% month on month, a little slower than expected.
While markets are initially reading this as a very hot report that may lead to another Fed hike this year, we should take a step back and look at the big picture. Wage growth is moving into a range consistent with overall inflation being in the Fed’s target range. With the unemployment rate holding steady at 3.8% amid higher labor force participation, the big increase in jobs feels like it’s driven more by people who want jobs than by employers who need workers but aren’t able to find them. That latter dynamic created the inflationary scenario the Fed is fighting. This report could be indicative of a very healthy labor market where a lot of jobs are being created and we don’t have wage growth pushing us into an inflationary spiral due to a labor shortage.
Importantly, this was a backward looking report like all economic data releases. The reference week for this data was the week of September 10. The next Fed meeting is November 1, before the next jobs report. In deciding whether to hike rates, the Fed will take into account that looking forward, there are risks that don’t show up in this data. Financial conditions tightened significantly after this data was collected with the yield on the 10-year treasury note increasing about 500 basis points. This essentially substitutes for a rate hike and substantially increases the odds of economic weakness and financial market fragility. With the House of Representatives in chaos, a government shutdown appears to be looming in mid-November even after we avoided it on October 1. The resumption of student loan payments as of October 1 will likely drag down consumer spending, which will in turn weigh on the labor market. This data was also collected before the UAW strikes started; those strikes could expand. On the other hand, the Hollywood strikes seem to be resolving, which could push up employment growth.
The initial reaction in the Fed Funds futures market and treasury markets point to higher rates amid another Fed hike. But, for all of the reasons above, I don’t think the Fed will hike on November 1. Hopefully markets will pull back from the initial surge in rates after digesting the data. However, the forces that have been pushing rates up more broadly (e.g., concerns about the treasury supply and fiscal situation, moving to a regime of higher rates for longer) remain and will keep mortgage rates near where they are.