Federal Reserve policymakers now appear to have strong grounds to postpone any further interest rate hikes in the near term, following the release of official data showing the U.S. labor market is cooling more than expected. The latest report from the U.S. Department of Labor on Friday confirmed that hiring activity is undergoing a significant slowdown.
According to the report, U.S. employers added only 29,000 jobs in September, falling far short of the consensus forecast of 90,000 new positions. This weakness was compounded by downward revisions to August's payroll figures, while the official unemployment rate rose to 4.2% from 4.1% the previous month.
This lackluster data has altered the outlook for the central bank's monetary policy; the Fed had previously raised short-term borrowing costs by 25 basis points in September to rein in inflation toward its 2% target. Prior to this, the Fed had signaled a readiness to implement further rate hikes before year-end—contingent on a strong labor market—should inflation driven by the Iran conflict persist.
Financial markets immediately adjusted their expectations regarding the probability of policy tightening. The likelihood of the Fed raising rates at the October Federal Open Market Committee (FOMC) meeting has now dropped to less than 20%, down from over 25% prior to the release of the employment report. Despite a scaling back of bets regarding the October meeting, futures traders remain wary of the prospect of tightening towards the end of the year. Although expectations for a rate hike at the December meeting have also moderated, the market is still pricing in a high probability—approaching 90%. This suggests that the Fed will move to raise borrowing costs before the end of 2026 if pressures on oil and energy prices fail to subside.
