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Payrolls rose 263,000 in September as the unemployment rate fell to 3.5% amid Fed rate hikes

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Job growth fell short of expectations in September as the Federal Reserve’s efforts to slow inflation took their toll on hiring, the Labor Department reported Friday.

Nonfarm payrolls rose 263,000 for the month, compared to the Dow Jones estimate of 275,000. The unemployment rate was 3.5% versus the forecast of 3.7%.

The September wage figure marked a slowdown from earnings of 315,000 in August and equaled the lowest monthly increase since April 2021.

In closely monitored wages, average hourly wages rose 0.3% over the month, in line with estimates, and 5% from a year ago, an increase that is still well above the pre-pandemic norm, but 0.05%. 1 percentage point below forecast.

Stock market futures fell after publication, while government bond yields rose.

From an industry perspective, leisure and hospitality led gains with an increase of 83,000, a gain that still pushed the industry 1.1 million jobs below the pre-pandemic levels of February 2020.

Elsewhere, healthcare added 60,000, professional and business services increased by 46,000 and manufacturing contributed 22,000. Construction increased by 19,000 and wholesale increased by 11,000.

On the negative side, financial activities and transportation and warehousing both saw 8,000 job losses.

The report comes amid a months-long effort by the Federal Reserve to push inflation near its highest annual rate in more than 40 years. The central bank has raised interest rates five times this year for a total of 3 percentage points and is expected to continue to hike through the end of the year.

Despite the increases, job growth had remained relatively strong as companies face a huge mismatch between supply and demand, leaving about 1.7 vacancies for every available employee. That, in turn, has pushed up wages, although the increase in average hourly wages has lagged far behind inflation, which recently stood at 8.3%.

Fed officials, including chairman Jerome Powell, have said they expect the rate hikes to inflict “some pain” on the economy. Members of the Federal Open Market Committee indicated in September that they expect the unemployment rate to rise to 4.4% in 2023 and remain around that level, before falling to 4% in the long term.

Markets generally expect the Fed to continue the pace of its rate hikes with another 0.75 percentage point hike in November. Traders gave a 78% chance of a three-quarter point move according to jobs data, and expect another half-point increase in December, pushing Federal Funds interest rates to a range of 4.25%-4.5% .

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