Labor Market Resilience Tests Fed's September Rate Hike Plans

The US Federal Reserve may face a tougher decision on interest rates in September due to the resilience of the labor market, according to ICICI Bank Research. The research firm noted that the August jobs report showed a stronger-than-expected increase in non-farm payrolls by 162,000, well above expectations of 55,000.

The gains were led by leisure and hospitality and local government education, with hiring being relatively broad-based across various sectors. However, ICICI Bank Research cautioned that the labor market remains weaker than its pre-pandemic trend, with the three-month average of payroll additions at 71,000 significantly below the roughly 180,000 monthly average seen during the steady state before the pandemic.

The report also noted that wage growth continued to moderate, with average hourly earnings rising 3.1 per cent year-on-year in August compared with 3.2 per cent in July. ICICI Bank Research expects labor-market softness to persist, even as the August data reduces immediate concerns about a significant employment slowdown.

The stronger payroll print has increased pressure on the Federal Open Market Committee (FOMC) to consider a September rate hike, with inflation data due next week likely to be decisive for the policy outcome. Financial markets have already reacted, with the dollar index and US Treasury yields rising following the jobs data.