The US created only 29 thousand jobs: weak labor market lowered expectations of a Fed rate hike

The US labor market in September turned out to be much weaker than expected. The American economy created only 29 thousand non-farm jobs, while economists expected about 90 thousand. Unemployment simultaneously rose from 4.1% to 4.2%.

Another alarming signal came from past months: data for July and August were revised down by a total of 60 thousand jobs. After the report's release, investors sharply reduced expectations of a new interest rate hike by the US Federal Reserve (Fed) already in October.

Weak hiring is important far beyond the American labor market. Fed decisions affect government bond yields, the cost of credit, the dollar exchange rate, and sentiment on global stock markets.

29 thousand jobs instead of the expected 90 thousand

According to the US Bureau of Labor Statistics (BLS), non-farm employment in September increased by only 29 thousand people.

This is significantly below the market forecast of about 90 thousand and continues the trend of weak hiring.

August's job growth after revision amounted to 133 thousand instead of the initially reported 162 thousand. Even more noticeable were the July changes: instead of an increase of 21 thousand, the BLS now shows a employment contraction of 10 thousand.

Thus, in just the two previous months, 60 thousand jobs disappeared from the statistics.

The average monthly job growth over the past 12 months has fallen to about 45 thousand. This shows how much the current labor market differs from the rapid recovery period after the pandemic, when the US economy regularly created hundreds of thousands of jobs per month.

Unemployment rose, and wages increased by only 0.1%

The unemployment rate in September rose from 4.1% to 4.2%. The number of unemployed amounted to about 7.1 million people.

At the same time, the situation does not yet look like a sharp surge in layoffs. Since March, unemployment has remained in a relatively narrow range of 4.1% to 4.3%, and the labor force participation rate in September was 61.8%.

In other words, the main problem now is not mass job losses, but a noticeable slowdown in hiring.

Wage growth also turned out to be moderate. Average hourly earnings in the private sector increased by 0.1% for the month, to $37.81. Over the year, wages rose by 3.0%.

Of the major industries, healthcare continued to grow most noticeably, with about 17 thousand jobs added in September. In most other major sectors, the BLS did not record a significant change in employment.

Why the weak labor market creates a problem for the Fed

The September report came out less than three weeks after the Fed raised interest rates for the first time since 2023.

On September 16, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 0.25 percentage points to 3.75–4.00%.

The reason remained inflation. The Fed said that price growth is still too high and the regulator aims to bring inflation back to its long-term target of 2%.

But the US central bank has a dual mandate: to maintain price stability and at the same time strive for maximum employment.

When inflation is high, a rate hike helps cool the economy: credit becomes more expensive, demand and investment slow down. But the same mechanism can hit companies and the labor market.

Therefore, the new data make the Fed's next step more difficult. The regulator now has to consider not only the risk of persistent inflation, but also the possibility of an excessively strong slowdown in employment.

Probability of a new rate hike in October fell sharply

Financial markets reacted to the report almost immediately.

Before the statistics were published, traders estimated the probability of a new rate hike at the Fed meeting on October 27–28 at more than 25%. After the report's release, it fell to below 20%.

This is a market estimate, not a decision by the Fed itself, and it can change quickly after new data.

But the direction of the reaction is telling: weak hiring reinforced expectations that after the September hike, the central bank might pause.

At the same time, yields on US government bonds fell, the dollar came under pressure, and the stock market received support. For investors, weaker employment means less risk that the cost of money will rise as quickly as previously feared.

However, the scenario of further rate increases has not completely disappeared. Immediately after the report's release, markets still assessed the probability of a rate hike by the end of the year as high.

Why the Fed's rate is important not only for the US

The decisions of the American central bank extend far beyond the US.

The Fed's rate affects yields on US Treasury bonds, which serve as one of the key benchmarks for the cost of money in the global financial system.

When American rates rise, dollar loans and financing usually become more expensive. High yields on American assets can also attract capital to the US and support the dollar.

For the stock market, high interest rates mean more expensive loans for companies and a more attractive alternative to stocks in the form of bonds. Therefore, any signs that the Fed may raise rates less or later can support equities—especially technology companies most sensitive to the cost of capital.

The flip side is that an excessively weak labor market itself can mean a slowdown in the world's largest economy. So for markets, it is not just a low rate that matters, but a balance between reducing inflation and maintaining economic growth.

Now all attention shifts to inflation

One weak employment report alone will not determine the Fed's decision.

Before the October 27–28 meeting, the regulator will receive additional data on inflation, business activity, and the state of the economy.

September consumer price statistics will be especially important. If inflationary pressure remains strong, the Fed will have to choose between two risks: stopping the fight against rising prices too early or further cooling an already significantly weakened labor market.

The 29 thousand new jobs in September are therefore important not only as another statistical figure.

After several months of weak hiring, the question for the Fed is changing: the regulator now needs to assess not only how much further inflation needs to be restrained, but also whether the next rate hike will not be too heavy for the labor market.

Sources: US Bureau of Labor Statistics (BLS), US Federal Reserve System, Reuters, Associated Press.