In-depth Analysis

Unemployment rate continues to decline – More interest rates to come?

 

US Non-farm Payrolls show that the economy added 263,000 jobs in September after creating 315,000 jobs in August. The change in total NFP was also revised up for July, from 526,000 to 537,000.

Here are other key takeaways from the September employment report:

  • The number of unemployed persons dropped slightly to 5.8 million.
  • The unemployment rate is slightly down at 3.5%.
  • Average hourly earnings increased 0.3% in September, or 10 cents. All private nonfarm payroll workers’ average hourly wages increased by 10 cents to $32.46 last month. The average hourly wage has increased by 5% over last year.
  • American stock futures are down after the report.

The labor gap in the United States is beginning to shrink, which may provide support for the Federal Reserve’s aggressive monetary policy

As a reminder, the labor gap is the difference between the number of people looking for work and the number of jobs available.

In August, there were a total of 10.05 million job opportunities, which is down by 10% from the 11.17 million that was reported in July, and is more than a million less than what market participants had anticipated.

Despite this, there were still 1.7 people looking for work for every vacant position, which is close to the highest ratio on record. The August reading also represented the highest one-month drop since April 2020, which was during the early stages of the Covid-19 pandemic.

This release is a possible early hint that the vast labor gap that has existed in the United States is beginning to narrow, which may give the Federal Reserve more room to continue increasing interest rates.

According to the New-York Times, Fed members believe that rising interest rates would not cause businesses to reduce their workforce by laying off employees – rather, they would dampen economic activity by simply causing businesses to require fewer workers overall. Up to this point, that has been taking place, albeit very slowly.

The data for Job Openings and Labor Turnover (JOLTS) and the NFP report are regularly followed by FOMC officials as they strive to curb runaway inflation by tightening the monetary policy of the United States, mostly through interest rate hikes. The Federal Reserve has already decided to raise interest rates five times this year, which has resulted in an overall cumulative increase of three percentage points.

At its last meeting in September, the Federal Reserve raised its key interest rates by 75 basis points once again, bringing the Fed Funds range to 3-3.25%. It is the third hike of this scale this year.

Still, there is still some work to do to reach the 2% inflation target of the Fed, as the latest data shows that the annual US CPI reached 8.3%. The Fed Chair, Jerome Powell, is warning that the job is far from done, with additional increases anticipated over the coming meetings.

As interest rates are at their highest level since the Covid-19 pandemic, markets continue to anticipate that the Federal Reserve will move forward with a fourth consecutive increase of 0.75 percentage points at its next meeting on November 1-2.

 

 

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