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The U.S. labor market cooled in August, raising hopes that the Federal Reserve will successfully engineer a soft landing for the world’s largest economy.
Investors welcomed a possible Goldilocks scenario in which inflation comes under control without triggering a recession, as Friday’s numbers showed a rise in the unemployment rate, subdued job growth and wages rising to pre-Covid levels.
“If the Fed could have put together its ideal jobs report, it would look something like it does today,” said Andrew Hollenhorst, an economist at Citi.
But he added: “We should be careful about looking at a month’s worth of data and saying we’re in the clear.”
The vast majority of investors already expected the central bank to keep interest rates stable at its next meeting at the end of September.
But after Friday’s data release, futures markets cut the probability of a rate hike at the following November meeting from just under 50 percent to less than 40 percent.
Investors and policymakers are paying close attention to signs that the U.S. labor market is cooling, as jobs and wage growth are major contributors to inflation.
In his comments on Friday’s numbers, US President Joe Biden dismissed “experts” who had argued that a sharper decline was needed to bring the price rise under control.
Instead, he said his government had “managed for months to bring down inflation while creating jobs and increasing wages.”
Bureau of Labor Statistics data showed unemployment rose slightly to 3.8 percent last month, compared with economists’ forecasts; At 3.5 percent, it would remain almost stable at its lowest level in several decades.
Monthly wage growth of 0.2 percent was also lower than forecast, although the year-over-year growth rate of 4.3 percent remained well above the level consistent with the Fed’s 2 percent inflation target.
The economy added 187,000 new nonfarm jobs in August – above forecasts of 170,000 but below the 200,000 mark for the third straight month.
The totals for the previous two months were also revised lower to a total of 110,000.
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Wage and unemployment developments were boosted by more people returning to the labor market and the labor force participation rate rising for the first time since February. Such an increase in labor supply could also help slow wage growth.
Natixis portfolio manager Jack Janasiewicz said continued “bringing people off the sidelines and into the workforce” would lead to “general downward pressure on wages.”
Friday’s figures followed separate data released this week that also suggested demand for workers was weakening and job vacancies fell more than expected.
“The report shows that the labor market is rebalancing in a good way – an increase in labor force participation is what we want to see,” said Sonal Desai, chief investment officer of Franklin Templeton Fixed Income.
“A rate hike in September is now very unlikely, but it is still too early to say that all rate hikes are off the table.”
However, other economists expressed concern that the Fed would put too much pressure on the economy.
“The likelihood of a hard landing continues to grow as long as the Fed continues to talk about the possibility of rate hikes,” said Priya Misra, portfolio manager at JPMorgan Asset Management.
“Simply maintaining their options means that restrictive real interest rates will remain in place,” she added, citing the impact of expectations on real borrowing costs.
In his annual speech at the Fed’s economic symposium last week in Jackson Hole, Wyoming, Fed Chairman Jay Powell stressed that the central bank was “prepared to raise interest rates further if necessary” but said policymakers would be cautious , if they tried to bring inflation under control while minimizing the damage to the overall economy.
Stock and bond prices initially rose after the data was released, but then gave up their initial gains. The S&P 500, which slipped into negative territory around midday, closed 0.2 percent higher.
Additional reporting by Jennifer Hughes in New York