September job gains affirm that the Fed has a long way to go in inflation fight



The Go! Go! Curry restaurant has a sign in the window reading “We Are Hiring” in Cambridge, Massachusetts, July 8, 2022.

Brian Snyder | Reuters

September’s jobs report provided both assurance that the jobs market remains strong and that the Federal Reserve will have to do more to slow it down.

The 263,000 gain in nonfarm payrolls was just below analyst expectations and the slowest monthly gain in nearly a year and a half.

But a surprising drop in the unemployment late and another boost in worker wages sent a clear message to markets that more giant interest rate hikes are on the way.

“Low unemployment used to feel so good. Everybody who seems to want a job is getting a job,” said Ron Hetrick, senior economist at labor force data provider Lightcast. “But we’ve been getting into a situation where our low unemployment rate has absolutely been a significant driver of our inflation.”

Indeed, average hourly earnings rose 5% on a year-over-year basis in September, down slightly from the 5.2% pace in August but still indicative of an economy where the cost of living is surging. Hourly earnings rose 0.3% on a monthly basis, the same as in August.

No ‘green light’ for a Fed change

Fed officials have pointed to a historically tight labor market as a byproduct of economic conditions that have pushed inflation readings to near the highest point since the early 1980s. A series of central bank rate increases has been aimed at reducing demand and thus loosening up a labor market where there are still 1.7 open jobs for every available worker.

Friday’s nonfarm payrolls report only reinforced that the conditions behind inflation are persisting.

To financial markets, that meant the near certainty that the Fed will approve a fourth consecutive 0.75 percentage point interest rate hike when it meets again in early November. This will be the last jobs report policymakers will see before the Nov. 1-2 Federal Open Market Committee meeting.

Experts debate whether the Fed will continue with another 75-basis point rate hike

“Anyone looking for a reprieve that might give the Fed the green light to start to telegraph a pivot didn’t get it from this report,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Maybe the light got a little greener that they can step back from” two more 0.75 percentage point increases and only one more, Sonders said.

In a speech Thursday, Fed Governor Christopher Waller sent up a preemptive flare that Friday’s report would do little to dissuade his view on inflation.

“In my view, we haven’t yet made meaningful progress on inflation and until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed’s balance sheet, to help restrain aggregate demand,” Waller said.

Markets do, however, expect that November probably will be the last three-quarter point rate hike.

Futures pricing Friday pointed to an 82% chance of a 0.75-point move in November, then a 0.5-point increase in December followed by another 0.25-point move in February that would take the fed funds rate to a range of 4.5%4.75%, according to CME Group data.

What concerns investors more than anything now is whether the Fed can do all that without dragging the economy into a deep, prolonged recession.

Pessimism on the Street

September’s payroll gains brought some hope that the labor market could be strong enough to withstand monetary tightening matched only when former Fed Chairman Paul Volcker slew inflation in the early 1980s with a fund rate that topped out just above 19% in early 1981.

“It could add to the story of that soft landing that for a while seemed fairly elusive,” said Jeffrey Roach, chief economist at LPL Financial. “That soft landing could still be in the cards if the Fed doesn’t break anything.”

Investors, though, were concerned enough over the prospects of a “break” that they sent the Dow Jones Industrial Average down more than 500 points by noon Friday.

Commentary around Wall Street centered on the uncertainty of the road ahead:

  • From KPMG senior economist Ken Kim: “Typically, in most other economic cycles, we’d be very happy with such a solid report, especially coming from the labor market side. But this just speaks volumes about the upside-down world that we’re in, because the strength of the unemployment report keeps the pressure on the Fed to continue with their rate increases going forward.”
  • Rick Rieder, BlackRock’s chief investment officer of global fixed income, joked about the Fed banning resume software in an effort to cool job hunters: “The Fed should throw another 75-bps rate hike into this mix at its next meeting … consequently pressing financial conditions tighter along the way … We wonder whether it will actually take banning resume software as a last-ditch effort to hit the target, but while that won’t happen, we wonder whether, and when, significant unemployment increases will happen as well.”
  • David Donabedian, CIO at CIBC Private Wealth: “We expect the pressure on the Fed to remain high, with continued monetary tightening well into 2023. The Fed is not done tightening the screws on the economy, creating persistent headwinds for the equity market.”
  • Ron Temple, head of U.S. equity at Lazard Asset Management: “While job growth is slowing, the US economy remains far too hot for the Fed to achieve its inflation target. The path to a soft landing keeps getting more challenging. If there are any doves left on the FOMC, today’s report might have further thinned their ranks.”

The employment data left the third-quarter economic picture looking stronger.

The Atlanta Fed’s GDPNow tracker put growth for the quarter at 2.9%, a reprieve after the economy saw consecutive negative readings in the first two quarters of the year, meeting the technical definition of recession.

However, the Atlanta Fed’s wage tracker shows worker pay growing at a 6.9% annual pace through August, even faster than the Bureau of Labor Statistics numbers. The Fed tracker uses Census rather than BLS data to inform its calculations and is generally more closely followed by central bank policymakers.

It all makes the inflation fight look ongoing, even with a slowdown in payroll growth.

“There is an interpretation of today’s data as supporting a soft landing – job openings are falling and the unemployment rate is staying low,” wrote Citigroup economist Andrew Hollenhorst, “but we continue to see the most likely outcome as persistently strong wage and price inflation that the Fed will drive the economy into at least a mild recession to bring down inflation.”

Job openings data suggest the economy and labor market are still growing, says Goldman's Hatzius

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