September hourly earnings rose 0.1% month-on-month; non-farm payroll growth slowed to just 29,000.
Concerns over a wage-price spiral ease; focus turns to the October 14 CPI report to assess the need for further tightening.
The cooling of U.S. employment and wage growth has significantly bolstered expectations that the Federal Reserve will hold interest rates steady in October. As signs of an overheating labor market that could further stoke inflation dissipate, analysts suggest the Fed now has the breathing room to await further economic data before deciding on its next move.
The Federal Reserve raised its benchmark interest rate by 0.25 percentage points last month to a range of 3.75% to 4.00%, a move intended to counter inflationary pressures driven by rising energy costs and increased investment in artificial intelligence (AI). New York Fed President John Williams emphasized on the 29th of last month that it is crucial to prevent the shocks that have driven prices higher from becoming entrenched, and to curb the resulting "second-round effects."
Wages represent a primary channel through which these second-round effects manifest. If workers seek faster wage hikes to offset the rising cost of living, and companies pass those higher labor costs on to consumers through elevated prices, inflation can become self-perpetuating. Even if the initial shock subsides, this "wage-price spiral" can cause inflation to remain persistent.
Interest rate hikes act as a brake on this cycle. By increasing the cost of borrowing, the Fed dampens consumption and investment, which in turn reduces corporate demand for labor. As demand for labor wanes, upward pressure on wages tends to subside. President Williams noted that while monetary policy cannot directly solve energy supply disruptions, it can reduce the risk of those shocks evolving into broad-based, sustained inflation.
The latest employment report confirms a deceleration in the pace of wage growth. According to data released by the U.S. Bureau of Labor Statistics on the 2nd, the average hourly earnings for the private sector rose 0.1% in September, a slowdown from the 0.3% increase recorded in August. The year-on-year growth rate stood at 3.0%. Previously, it was reported that real average hourly earnings for August had declined by 0.3% year-on-year. With the purchasing power of hourly wages shrinking due to inflation, the pace of nominal wage growth has also begun to moderate, which is expected to ease the pressure on companies to further raise prices to cover labor costs.
Job growth, which correlates with corporate hiring demand, also slowed. Non-farm payrolls increased by only 29,000 in September, a significant reduction from the revised 133,000 added in August. Furthermore, job growth figures for July and August were revised downward by a combined 60,000, and the unemployment rate edged up from 4.1% to 4.2%. Taken together with softening wage growth, the data provides less justification for an aggressive tightening campaign based on an overheated labor market.
This aligns with the wait-and-see stance the Fed had signaled even before the report was released. In his recent address, President Williams stated that there was no clear evidence that the labor market was further fueling inflationary pressures, adding that after the September rate hike, the Fed has the luxury of time to evaluate incoming information.
Market expectations for a pause have consequently risen. The Wall Street Journal reported on the 2nd that immediately following the release of the jobs report, the probability of a rate hold in October, as reflected in CME FedWatch interest rate futures, climbed from 72% to 86%.
The remaining variable is non-wage inflationary pressure. Fed Vice Chair Philip Jefferson pointed out on the 1st that even as nominal wage growth slows, core services inflation—excluding housing—has trended upward this year. Additionally, the surge in demand for AI-related technology is driving up production costs for related goods and services. Even if wage growth slows, price stability may be delayed if other input costs continue to rise.
As a result, projections for an October pause and potential further hikes before year-end coexist. Michael Feroli, chief U.S. economist at JPMorgan, as cited by Reuters, noted that while cooling wage growth has reduced the urgency for immediate rate hikes, he maintains a forecast for a December increase, premised on the expectation that the deceleration of core inflation will be sluggish.
The next key indicator to watch is the Consumer Price Index (CPI) for September, due on the 14th. The critical question is whether the easing in wage growth will be followed by a cooling trend in the prices of goods and services. The Fed will use this data to determine whether to maintain current rates or if further action is required.
