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The U.S. labor market cooled in August, raising hopes that the Federal Reserve will succeed in brokering a soft landing for the world’s largest economy.
Investors welcomed a possible “Goldilocks” scenario, in which inflation is contained without causing a recession, after data on Friday showed unemployment rising, job growth slowing and wages rising to pre-pandemic levels.
“If the Fed could produce a good jobs report, it would be like it is today,” said Andrew Hollenhorst, an economist at Citigroup.
But he added: “We should be cautious about taking a month’s worth of data and saying we have it all figured out.”
The vast majority of investors already expect the central bank to keep rates steady at its next meeting in late September.
But after Friday’s data, futures markets lowered the probability of a rate hike at the subsequent November meeting to less than 40 percent from just under 50 percent.
Investors and policymakers are closely watching for signs that the U.S. labor market is cooling, as job and wage growth are key factors in inflation.
In comments responding to Friday’s data, U.S. President Joe Biden pushed back on “experts” who say a deeper economic contraction is needed to keep prices in check.
Instead, he said his government had “reduced inflation for months while creating jobs and raising wages”.
The unemployment rate edged up to 3.8% last month, according to the Bureau of Labor Statistics, while economists forecast it would hold steady at a recent multi-decade low of 3.5%.
Monthly wage growth of 0.2% was also lower than expected, but the 4.3% year-on-year increase was still well above the Fed’s 2% inflation target.
The economy created 187,000 new nonfarm jobs in August, beating expectations for 170,000 jobs but falling below the 200,000 mark for the third straight month.
The total for the previous two months was also revised to show a cumulative decline of 110,000.
Wage and unemployment trends were helped by more people returning to the labor force, with the labor force participation rate rising for the first time since February. An increase in labor supply may also help slow wage increases.
Jack Janasiewicz, a portfolio manager at Natixis, said that would “put downward pressure on wages in general” as “getting people off the sidelines and into the job market” continues.
Friday’s data followed separate data released this week that also showed labor demand was slowing, with the number of job vacancies falling more than expected.
“The report shows that the labor market is rebalancing in a good way — an increase in labor force participation is what we would like to see,” said Sonal Desai, chief investment officer of fixed income at Franklin Templeton.
“A rate hike in September is now very unlikely, but it’s too early to say all hikes are off the table.”
But other economists expressed concern that the Fed would oversqueeze the economy.
“As long as the Fed continues to talk about the possibility of rate hikes, the chances of a hard landing are increasing,” said Priya Misra, a portfolio manager at JPMorgan Asset Management.
“As long as their option is preserved, that means restrictive real interest rates remain in place,” she added, referring to the expected impact on real borrowing costs.
Fed Chairman Jay Powell, in his annual speech last week at the Fed’s economic symposium in Jackson Hole, Wyoming, stressed that the central bank was “ready to raise rates further as appropriate,” but said policymakers were trying to balance controlling inflation. The process will be done with caution to minimize damage to the overall economy.
Stock and bond prices initially rose after the data, but pared early gains. The S&P 500 fell into negative territory around midday, before closing up 0.2%.
Additional reporting by Jennifer Hughes in New York