Fed rate hike expectations fade after weak U.S. jobs report

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Weak jobs data cut October rate hike bets

U.S. hiring slows sharply in September

The U.S. economy added just 29,000 jobs in September, well below market expectations. At the same time, the unemployment rate rose to 4.2% from 4.1%, while data for previous months were revised lower.

According to official figures from the U.S. Bureau of Labor Statistics, employment across most major industries was little changed during the month. Wage growth also slowed, reducing the risk of additional inflationary pressure coming from the labor market.

The weak report is particularly important after the Fed’s decision in September to raise rates by 25 basis points. Until recently, a resilient labor market had given policymakers more room to continue tightening, but the September data have made that case considerably harder to sustain.

Fed gains more room to wait

As Business Recorder notes, the latest data give Federal Reserve officials more reason to hold off on another rate increase at the October meeting.

The Fed now faces a more conflicted economic picture. On one side, hiring is cooling, unemployment is edging higher and wage growth is losing momentum. On the other, inflation remains above the 2% target, while the energy shock and geopolitical risks continue to keep price pressures elevated.

A weaker labor market therefore does not necessarily mean that the rate-hiking cycle is over. Instead, it gives the Fed more room to wait for additional data and assess whether the slowdown in employment proves persistent.

Markets cut October rate hike bets

Markets have already shifted their expectations sharply. According to Traders Union, the probability of an October Fed rate hike fell to around 17% after the employment report was released. Just a week earlier, the implied odds of such a move were considerably higher.

Investors are not ruling out another increase later in the year, however. December remains a more plausible window for further tightening, particularly if inflation stays elevated or another rise in energy prices renews upward pressure on consumer prices.

For equities, that repricing is supportive in the near term. Lower expectations for an immediate rate increase ease pressure on bond yields and tend to benefit technology stocks in particular. The balance remains fragile, though, and the next move will depend on whether the labor market continues to cool without tipping the broader economy into a sharper slowdown.

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