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Fed Likely Pauses Rate Hikes as Unemployment Rises and Wage Growth Cools

Elinor Rozenvasser Updated: September 5, 2023 • 3 min read

Key Points:

  • Traders bet on the Federal Reserve halting interest rate hikes due to a rise in unemployment and slowing wage growth.

  • The Labor Department's report showed the unemployment rate increased to 3.8% from 3.5%, while average hourly earnings rose 4.3% YoY.

  • Cleveland Fed President Loretta Mester remains hawkish, suggesting the need for further rate hikes.

In a significant shift in market sentiment, traders are increasingly convinced that the U.S. Federal Reserve is putting its interest rate hike plans on hold. This change comes following a government report revealing an uptick in the unemployment rate and a cooling of wage growth. In this article, we delve into the implications of this report and its potential impact on the Fed's monetary policy decisions.

Market Reaction and Fed's Stance

The futures market, which settles based on the Fed's policy rate, had already indicated a low probability of a rate hike for the current month. However, in light of the latest jobs report, the chances of further policy tightening this year have dropped to approximately 38%, down from around 45% before the report's release.

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Unemployment Rate and Wage Growth

The Labor Department's report showed a notable increase in the unemployment rate, rising from 3.5% to 3.8% over the past month. Additionally, average hourly earnings saw a modest deceleration, growing at a rate of 4.3% YoY, compared to 4.4% in July. While employers added 187,000 workers to their payrolls in August, revisions indicated that job growth in the preceding months was not as robust as initially reported.

Expert Opinion: Peter Cardillo, Chief Market Economist at Spartan Capital Securities, commented on the report's implications, saying, "This report is likely to put the Fed on hold in September, and if we get more positive inflation news in September and October, the Fed is likely done, and we’ve seen the end of the rate hikes."

The Federal Reserve had been aggressively raising short-term borrowing costs since March 2022 in an effort to combat 40-year-high inflation. Its most recent move occurred in July when it expanded the target range for the benchmark rate to 5.25%-5.50%. While inflation has receded from its peak of 7% last summer to 3.3% last month, according to the Fed's preferred measure, policymakers remain concerned about its persistence above the 2% target.

Differing Views Within the Fed

Cleveland Fed President Loretta Mester indicated that she may need further convincing regarding the necessity of rate hikes. She believes that the Fed should raise rates a bit more, a viewpoint that was shared by most of her colleagues as of June.

"In the labor market, some progress is being made in bringing demand and supply into better balance, but the job market is still strong," she emphasized during a European Central Bank conference shortly after the release of the latest jobs report.

"In the labor market, some progress is being made in bringing demand and supply into better balance, but the job market is still strong" 

As of now, traders anticipate that the Fed will remain on hold until April 2024. This includes rate cuts expected to commence in May. These projections reflect the evolving economic landscape and the Fed's attempts to balance inflation concerns accordingly.

The Bottom Line

The latest jobs report has reshaped expectations for the Federal Reserve's monetary policy. For individuals, this shift means that interest rates may stabilize for the time being, impacting borrowing costs and investment decisions. To navigate this evolving landscape effectively, it's crucial to stay informed about the Fed's actions and the broader economic context. Considering mortgage refinancing, investments, or other financial choices? Understanding the impact of interest rates on your personal finances is essential. Stay vigilant, consult financial experts, and adapt your strategies to the evolving economic climate. With all these in mind, making informed decisions tailored to your financial goals is within reach.

Elinor Rozenvasser is a content writer and editor with a knack for finance. She holds a Bachelor's in Communications and Business from Reichman University, and has been swimming alongside finance specialists for over a decade. She's not your typical financial writer, though. She's more likely to use witty puns and sarcasm than jargon and technical terms. But don't let that fool you. She's still a whiz when it comes to explaining complex financial concepts in a way that anyone can understand. If there's any writer who can make finance fun and engaging, Elinor is your girl. She's sure to leave you laughing (and learning) long after you've finished reading her work.