October Jobs Surge Gives the Fed More Room to Raise Rates

The October jobs tally came in at 165,000, more than twice what economists had expected. The unemployment rate also slipped, to 4.1 percent from 4.2 percent. The surprise followed a weak September reading and a rough week for stocks, but it did not change the longer pattern. That pattern was steady hiring, few layoffs and a tough search for people trying to find work. ^1,2

That 165,000 gain came from hiring across several industries. Professional and business services added 70,000 jobs, health care added 42,000, transportation and warehousing gained 25,000, and manufacturing added 19,000. The Labor Department also revised August and September upward by a combined 84,000 jobs. Pay rose 0.4 percent in October, while average hourly earnings were up 3.1 percent from a year earlier.^2,8 That 3.1 percent is still below the 3.7 percent inflation rate reported for September. ³

The gap between pay and prices helps explain why a strong main number may not feel like good news at home. People looking for work, including recent graduates, still face few openings, while workers with jobs have less power to ask for higher pay as wage growth slows.^1,6 The report also shifted market expectations: traders put the chance of a December rate increase at 78 percent, up from 70 percent before the report. Treasury yields and the dollar rose, while the stronger outlook for rates weighed on gold.^5,7 A rate rise could lift returns for savers, but it can also make loans and credit-card debt more costly.

Those rate bets now turn attention to the next inflation report, due Tuesday, and the Federal Reserve’s December meeting. The Fed kept its main interest rate at 3.75 to 4.00 percent in October after raising it in September.^9,11 The jobs figures give officials less reason to worry about a weakening labor market, but inflation and energy prices remain key concerns. The Fed will decide in December whether to raise rates again. ^7,11