Slower But Still-Steady Job Gains Keep Fed Rate Hike on Track

  • Jobless rate rises as more Americans stream into labor force
  • December Fed move seen as remaining likely but not certain

Jobs Data Sets Up Question of When Fed Hikes Rates

More Americans like what they see in the job market, and Federal Reserve officials probably will too.

The share of working-age people in the labor force climbed to a six-month high in September and wage growth picked up, while the unemployment rate rose to 5 percent. Payroll gains slowed for a third month and just missed analyst estimates, though August hiring was stronger than initially estimated, Labor Department data showed Friday.

With Fed Chair Janet Yellen flagging a rising participation rate as a healthy sign, the report probably won’t fundamentally alter the outlook that the central bank will raise interest rates in December. A hike still isn’t a sure thing, as two more employment reports remain this year and the Fed has repeatedly backed away from its previous forecasts for higher rates.

“Come back again next month,” said Michael Gapen, New York-based chief U.S. economist for Barclays Plc, who previously worked at the Fed. Friday’s report “has something for everybody, and therefore it is unlikely to move the market thinking or Fed thinking about a December rate hike.”

Chances of an interest-rate increase at or before the Fed’s December meeting stood at about 65 percent at 11:21 a.m. New York time, based on federal funds futures prices. That’s little changed from the previous day. Traders pared bets on a November increase already seen as unlikely.

U.S. economic growth is forecast to rebound in the second half after a weak first half, while remaining below the pace seen before the last recession.

The 156,000 increase in payrolls last month followed a 167,000 rise in August. While the September figure was weaker than the 172,000 median forecast of economists, it included the biggest drop in government employment in a year.

The labor participation rate edged up to 62.9 percent from 62.8 percent.

“The participation rate went up, the unemployment rate went up -- those two things are fine,” Fed Vice Chairman Stanley Fischer said at a banking conference on Friday in Washington. That means “employment was growing at a rate that’s fully consistent with keeping unemployment declining somewhat further.”

Average hourly earnings rose 0.2 percent from the prior month, compared with the 0.3 percent median estimate of economists. Pay increased 2.6 percent over the 12 months ended in September, following a 2.4 percent year-over-year gain in August.

The upticks in the participation and unemployment rates “would argue for more caution in letting the existing policy stance run further,” Gapen said. At the same time, most Fed policy makers will take comfort from other details in the report showing faster wage growth, the August revision and more hours worked, he said.

Yellen’s Views

Yellen said last month that the Fed decided to hold off from raising borrowing costs in part because inflation remains below the central bank’s 2 percent goal and there is also “scope for some further improvement in the labor market.” A rising labor-participation rate is a positive sign given an aging population, and increases in the employment-to-population ratio show people coming back into the job market, she said at a press briefing.

“My assessment would be, based on this evidence, that the economy has a little more room to run than might have been previously thought,” Yellen said Sept. 21. “That’s good news.”

Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said in a note that the economy “will retain sufficient momentum for a tightening move before year-end.”

The Fed is more likely to make a move on Dec. 14 than Nov. 2, which is six days before the U.S. election, “making it a lower probability despite the insistence of many Fed officials that all meetings are ‘live,”’ Shapiro said.

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