September Payrolls Rise 29,000, Cutting Fed Rate Hike Odds

U.S. employers added just 29,000 jobs in September, well short of forecasts, trimming October Fed rate hike odds to about 17% while December stays near 90%.

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U.S. job growth stalled in September, with nonfarm payrolls rising by 29,000, less than a third of the 90,000 gain forecast and below the prior 12-month average of 45,000 per month. The unemployment rate rose to 4.2% from 4.1%. The report cut the probability of a Fed rate increase at the October meeting to about 17%, though futures still price a December hike at nearly 90%.

The data landed two weeks after the Federal Reserve raised its benchmark rate by a quarter point on September 16, to a range of 3.75% to 4.00%. It gave markets the first evidence that the tightening campaign is starting to register in hiring.

What Did the September Jobs Report Show?

The September report showed a labor market losing momentum on three fronts: slower hiring, a higher jobless rate and downward revisions to earlier months. Payrolls grew 29,000, forecasts had clustered between roughly 84,000 and 95,000, and the Bureau of Labor Statistics lowered its estimates for July and August by a combined 60,000 jobs.

Wage growth also cooled. Average hourly earnings for private-sector employees rose 5 cents, or 0.1%, to $37.81 in the month. Over 12 months, pay is up 3.0%. That is a slower pace than the Fed has been targeting in its fight against inflation, and it reduces the pressure from labor costs on prices.

The combination of weaker hiring and softer pay is the main reason the report moved rate expectations so sharply. A single month is volatile, but the revisions suggest the slowdown began before September.

Why Did Markets React This Way?

Markets rallied because a weaker labor market lowers the odds that the Fed will keep tightening. Stock futures rose after the release, with Nasdaq-linked contracts leading gains, while Treasury yields and the dollar fell as traders pared back bets on further increases this year.

Pricing for the October meeting shifted most. Hike odds dropped to about 17%, and the likelihood that the Fed holds steady rose to roughly 77%. Technology shares benefited most from the move, since lower yields reduce the discount applied to future earnings.

How Does This Affect the Fed's Next Move?

The report makes an October hike unlikely but does not remove the case for a December increase. Futures still price a December move at nearly 90%, which means traders read the data as a delay and not a reversal.

The federal reserve faces a narrow path. Inflation remains above target, and policymakers have signaled they are prepared to raise interest rates further if price pressures persist. At the same time, a jobless rate that has risen 0.1 percentage point in a month, combined with revisions that remove 60,000 jobs from prior readings, strengthens the argument for patience.

Several data points will shape the December decision:

• The October employment report, due in early November.
• The next consumer price index readings, which show whether goods and services inflation is easing.
• Any further revisions to the July through September payroll figures.

What Does the Slowdown Mean for the Economy?

The slowdown suggests that business hiring is cooling under higher borrowing costs, though the unemployment rate of 4.2% remains low by historical standards. A jobless rate in that range is consistent with a labor market that is loosening, not breaking.

The 12-month average gain of 45,000 jobs per month is far below the pace of earlier in the expansion. Slower hiring typically weighs on consumer spending with a lag, and consumer spending is the largest component of U.S. growth. Employers face higher financing costs, and the September data point to caution in adding staff.

For households and lenders, the outcome matters through the path of short-term borrowing costs. A December hike would push the policy range above 4%, and would feed through to variable-rate loans and credit products.

Outlook

September's 29,000-job gain, a higher unemployment rate and 60,000 in downward revisions have lowered the immediate probability of a Fed rate increase, with October odds near 17%. The December meeting remains the key date, with a hike priced at close to 90%. The October jobs report and upcoming inflation data will decide whether the labor market weakness is enough to stop the Fed's tightening cycle or only to postpone its next step.