Solid jobs reports in August leave a jumbo rate hike from the Fed on the table in September

U.S. job growth cooled in August, but hiring was likely healthy enough last month for the Federal Reserve to approve another jumbo rate hike when it meets later this month.

Employers added 315,000 jobs in August, the Labor Department said in its monthly payrolls report released Friday, in line with 300,000 jobs forecast by Refinitiv economists. That is the lowest monthly increase since April 2021[ads1] and is a big drop from the jump of 526,000 recorded in July.

The unemployment rate, meanwhile, rose unexpectedly to a six-month high of 3.7% as the labor force participation rate rose.

Wages also continued to rise, but came in lower than forecast. Average hourly earnings increased by 0.3% for the month and 5.2% from the previous year, slightly below estimates of 0.4% and 5.3% respectively from Refintiv.

FED RAISES INTEREST RATES BY 75 BAPS IN SECOND HISTORIC BREAK TO MEET INFLATION

Now hiring signs are displayed in front of restaurants in Rehoboth Beach, Delaware, March 19, 2022. ((Photo by STEFANI REYNOLDS/AFP via Getty Images) / Getty Images)

Although markets reacted positively to the report initially, stocks closed lower on Friday after employment data opened the door to another 75 basis point interest rate hike later this month. The S&P 500 ended down 1.1%, while the Dow Jones Industrial Average fell 1.1% and the Nasdaq fell 1.3%.

“These data do little to derail the Fed from its current monetary policy path,” said RSM chief economist Joe Brusuelas. “We urge the Fed to raise the key rate by 75 basis points, and it should seek to raise the Federal Funds rate to 4% by the end of the year.”

While monthly job data is always important Federal Reserve watched this particular report closely for signs that the labor market is beginning to slow from its frenzied pace as policymakers try to wrestle inflation, which remains near a 40-year high, back to 2%.

Policymakers have already approved successive rate hikes of 75 basis points in June and July and have signaled that another increase of that magnitude is on the table in September, depending on upcoming economic data.

Friday’s report gave little insight into whether the Fed will go with an increase of three quarters of a percentage point, or a slightly smaller but still large half-point increase. Experts say the flatness of the report leaves the door open for a third increase of 75 points.

Federal Reserve Chairman Jerome Powell speaks during a press conference at the Federal Reserve Board building in Washington, Wednesday, July 27, 2022. (AP Photo/Manuel Balce Ceneta/AP Images)

“Despite the weaker job gains during August and the increase in the unemployment rate, these numbers are unlikely to deter the Fed from another sharp increase in interest rates at the September FOMC meeting,” said Ben Ayers, senior economist at Nationwide. “High inflation remains the main focus, and the labor market continues to show signs of continued strength.”

Traders are already pricing in a 58% chance of another 75 basis points at the conclusion of the Fed’s two-day meeting on Sept. 21, according to CME Group’s FedWatch tool, which tracks trading. However, another 44% think the Fed will go with a half-point increase instead.

The report came just a week after the Fed chairman Jerome Powell spooked the market with his keynote speech in Jackson Hole, Wyoming, where he renewed the specter of an increasingly hawkish Fed determined to fight inflation, regardless of the potential economic fallout.

FED RATE TAKING WILL NOT STOP INFLATION IF GOVERNMENT GOVERNMENT RATE REMAINS HIGH, PAGES PAPER

“While higher interest rates, slower growth and softer labor market conditions will bring inflation down, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability will mean far greater pain.”