The sand that the Federal Reserve is throwing in the economy’s gears is having less than its intended effect: employers accelerated hiring in September.

U.S. employers added 336,000 jobs in September, up from 227,000 in August, blowing past the expectations of economists polled by Dow Jones Newswires and the Wall Street Journal, who had only called for an increase of 170,000. It was the largest increase in jobs since January. Not only that, but August and July’s figures were upwardly revised by a total of 119,000. The unemployment rate stayed at 3.8%, a few ticks above its historic low.1 

The pickup in jobs was close to the days of 2022, when employers added an average 399,000 jobs per month, and is the latest indication that the Federal Reserve’s campaign of anti-inflation interest rate hikes that began in March 2022 isn't slowing down the labor market as much as the Fed has hoped.

By raising its benchmark interest rate to a 22-year high, the Fed has boosted interest rates for all kinds of credit, such as mortgages, credit cards, car loans, and business loans. That’s meant to stifle spending by consumers as well as business hiring and expansion, with the goal of allowing supply and demand to rebalance, pushing down inflation.

Higher interest rates have not only made financing more expensive, it’s also gotten harder to come by. Banks have gotten pickier about lending this year, restricting lines of credit and raising standards. Loan officers are fearful that borrowers won’t be able to pay their debts in an economic downturn, according to a survey by the Federal Reserve.

Concern about interest rates is one reason that for markets, the good news about hiring was bad news. Yields on 10-year Treasurys, which tend to rise on investor fears about inflation and set the tone for mortgage rates,  jumped to a 16-year high immediately after the report was released, and stock indexes fell.2 

Does This Mean The Fed Will Hike Rates Again?

Fed officials have been worried that wages have risen too rapidly as employers have competed for talent in a hot labor market, and that higher wages could fuel more increases to the cost of living. The unexpected jump in job growth could indicate there is upward pressure on wages,  spurring the central bank to continue squeezing the economy with high interest rates, economists said.

“The jump in employment, the extremely low level of unemployment claims, and the rise in job openings keep alive the possibility of the Fed raising rates one more time this year,” Kathy Bostjancic, chief economist for insurance company Nationwide, said in a commentary. “Moreover, it underscores that they will be in no hurry to cut rates—higher rates for longer.”

The report did hold at least one indication that the Fed still has breathing room to keep its rate steady: despite the jump in hiring, wages only rose 0.2%, the same as in August and the lowest since February 2022.3

“If job gains continued to be so strong without wages slowing, that would be a problem for the Federal Reserve,” Nick Bunker, head of economic research at the hiring lab of job website Indeed, wrote in a commentary. “But the deceleration of wages, even as demand for workers stays high, points toward a reserve of labor supply willing to be tapped.”

The job gains were widespread across industries, with the leisure and hospitality sector—which lost the most jobs during the pandemic—leading the way with a pickup of 96,000 jobs.

The jump in hiring underscored the unusual course of the economy over the past year, in which inflation has cooled with mass layoffs still nowhere in sight. That’s a stark contrast to previous episodes where the Fed has raised interest rates to combat inflation: eight of the last nine times the Fed has hiked rates, a recession and a period of mass unemployment has followed.

Other measures of unemployment have also stayed low: 207,000 people filed for unemployment last week, the Department of Labor said this week, far below the historical average of 366,401 going back to 1967. 

At the same time, inflation has fallen dramatically, to a 3.7% annual rate as of August. While still above the Fed's 2% target, its down from its recent peak of 9.1% in June 2022. That's raised hopes that the economy will have a rarely achieved "soft landing" from a period of high inflation rather than an economic crash.

Author's Note: Admin, Global CNI Point Inc