Future Rates Hikes In Sight

Last Friday, the September job report release saw an unexpected drop in the unemployment rate and an increase in worker salaries. The news sent a clear signal to markets that the Fed would have to pursue more massive rate hikes to slow inflation down.

  • The unemployment rate fell to 3.5%, indicating a tight labor market
  • The decline from 3.7% in August was due in part to people quitting the workforce as it shrank by 57,000 people last month
  • The labor force participation rate, or the proportion of working-age Americans who have or are seeking for work, fell to 62.3% in September from 62.4% in August

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

The Labor Market Tightness May Have Peaked

In August, job openings in the U.S. fell by nearly 1 million, but layoffs, hiring, separations, and quits all remained near similar levels. This suggests that firms are removing vacant positions while keeping their current workforce.

According to the Bureau of Labor Statistics' monthly Job Opportunities and Labor Turnover Survey (JOLTS), there were 10.1 million U.S. job openings in August, down from 11.2 million in July. This was the fewest number of job openings since June 2021.

  • Monthly openings in 2019 averaged close to 7 million, this suggests that labor market tightness may have peaked, and future months may see further easing
  • While the decrease in job openings is good news, it is still a secondary worry when compared to inflation:“The Fed is not going to quit until the inflation level goes down, [...]. That’s the one number they are focused on. This is good news, but not significant enough to change what the Fed wants to do.” Tim Hatton and Echo Liu from Lightcast

Future Rates Hikes In Sight

The Fed has referred to a historically tight labor market as a result of economic conditions that have pushed inflation readings to near their highest level since the early 1980s. The current rate hikes are intended to reduce demand, thereby easing up a labor market in which there are still 1.7 open jobs for every available worker.

  • When the Fed meets again in early November, it is almost inevitable that it will approve a fourth consecutive 0.75 percentage point interest rate hike

“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,” Fed Governor Christopher Waller


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Photo by Eric Prouzet on Unsplash.