September jobs gains confirm that the Fed still has a long way to go in the fight against inflation

The September jobs report provided both reassurance that the labor market remains strong and that the Federal Reserve will need to do more to slow it down.

The 263,000 gains in non-agricultural payroll was just below analysts’ expectations and the slowest monthly gain in nearly a year and a half.

But a surprising late fall in unemployment and a further increase in workers’ wages sent a clear message to markets that more gigantic interest rate hikes are on the way.

“Low unemployment used to feel so good. Anyone who seems to want a job gets a job,” said Ron Hetrick, senior economist at labor data provider Lightcast. “But we ended up in a situation where our low unemployment rate has absolutely been a big driver of our inflation.”

Indeed, average hourly earnings rose 5% year-over-year in September, down slightly from the pace of 5.2% in August, but still indicative of an economy where the cost of life increases. Hourly compensation rose 0.3% on a monthly basis, as in August.

Fed officials pointed to a historically tight labor market as a byproduct of economic conditions that pushed inflation readings near the highest point since the early 1980s. A series of central bank rate hikes have been aimed at reducing demand and therefore easing a labor market where there are still 1.7 jobs open for each available worker.

Friday’s nonfarm payrolls report only reinforced that the conditions driving inflation persist.

For financial markets, that meant the virtual certainty that the Fed will approve a fourth straight interest rate hike of 0.75 percentage points when it meets again in early November. This will be the last jobs report policymakers will see before the Federal Open Market Committee meeting on Nov. 1-2.

“Anyone looking for a reprieve that might give the Fed the green light to start telegraphing a pivot didn’t get it from this report,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Maybe the light has gotten a little greener that they can step back” two more 0.75 percentage point increases and only one more, Sonders said.

In a speech on Thursday, Fed Governor Christopher Waller delivered a precautionary message that Friday’s report would do little to deter his view of inflation.

“In my view, we have yet to make meaningful progress on inflation and until that progress is both significant and persistent, I support continued rate hikes, as well as continued cuts. of the Fed’s balance sheet, to help limit aggregate demand,” Waller said. .

Markets expect November to be the last three-quarter point rate hike, however.

Futures prices on Friday indicated an 82% probability of a 0.75 point move in November, then a 0.5 point increase in December followed by another 0.25 point move in February that would bring the federal funds rate at a range of 4.5% to 4.75%, according to data from the CME Group.

What worries investors more than anything now is whether the Fed can do all of this without dragging the economy into a deep and prolonged recession.

Investors, however, were sufficiently concerned about the prospects of a “breakout” that they sent the Dow Jones Industrial Average down more than 500 points before noon Friday.

Comments around Wall Street centered on the uncertainty of the road ahead:

• From KPMG Senior Economist Ken Kim: “Generally, in most other economic cycles, we would be very pleased with such a strong report, especially coming from the labor market side. But that says a lot about the upside-down world that we’re in, because the strength of the jobless report keeps the pressure on the Fed to continue with rate hikes going forward.”
• Rick Rieder, BlackRock’s chief investment officer for global fixed income, joked about the Fed’s ban on resume software in an effort to appease job seekers: “The Fed should launch another hike 75 bps rate in this mix at its next meeting…therefore pressing financial conditions are tightening along the way…We wonder whether to actually ban resume software as a last ditch effort to meet the target, but while that may not happen, we wonder if, and when, significant increases in unemployment will occur as well.”
• David Donabedian, Chief Information Officer at CIBC Private Wealth: “We expect the pressure on the Fed to remain elevated, with continued monetary tightening through 2023. The Fed is not done tightening the screws on economy, creating persistent headwinds for the stock market.
• Ron Temple, head of US equities at Lazard Asset Management: “As job growth slows, the US economy remains far too hot for the Fed to meet its inflation target. The path to a soft landing is getting harder and harder. doves left on the FOMC, today’s report might have further thinned their ranks.”

The jobs data let the third quarter economic situation improve.

The Atlanta Fed GDPNow tracking put growth for the quarter at 2.9%, a reprieve after the economy saw back-to-back negative readings in the first two quarters of the year, meeting the technical definition of a recession.

However, the Atlanta Fed salary tracking shows that workers’ compensation is growing at an annual rate of 6.9% through August, even faster than figures from the Bureau of Labor Statistics. The Fed tracker uses census data rather than BLS data to inform its calculations and is generally followed more closely by central bank policymakers.

All this gives the impression that the fight against inflation is underway, even with a slowdown in the growth of the wage bill.

“There is an interpretation of today’s data as supporting a soft landing – job creations are falling and the unemployment rate remains low,” wrote Citigroup economist Andrew Hollenhorst, “but we continue to seeing the most likely outcome as persistently high wage and price inflation that the Fed will drag the economy into at least a mild recession to bring inflation down.”