TThe U.S. labor market remained strong in September as the jobless rate unexpectedly returned to a record low, leaving the inflation-fearing Federal Reserve on course for another aggressive rate hike.
Nonfarm payrolls rose 263,000 in September after a 315,000 gain in August, the Labor Department reported on Friday. The unemployment rate fell to 3.5%, a five-decade low. Average hourly earnings rose steadily.
The average estimate in a Bloomberg survey of economists had called for a 255,000 advance in payrolls and the unemployment rate to remain at 3.7 percent. Hiring was relatively broad-based, resulting in gains in leisure and hospitality and health care. Meanwhile, employment in transportation and warehousing and financial activities declined.
The data is the latest illustration of the perennial strength of the US labor market. While there have been some signs of subdued labor demand—notably a recent decline in job openings and an increase in layoffs in some sectors—employers, many of whom are still short-staffed, continue to hire at a steady pace. This strength not only supports consumer spending but also fuels wage growth as businesses compete for a limited pool of workers.
Read more: Employers Take Note: Young workers are looking for jobs with a higher purpose
The Fed, meanwhile, hopes to see significant easing in labor market conditions, with the goal of curbing wage growth and ultimately inflation. While the payroll advance was the smallest since April 2021, policymakers are watching to see if their rate hikes trigger a rise in the unemployment rate.
This is the last jobs report Fed officials will have before their policy meeting in November, as they consider a fourth straight 75 basis point rate hike. New inflation data due next week will also play a fundamental role in their decision-making. The report is expected to show the depth and breadth of the Fed’s inflation problem, with a key consumer price index potentially worsening.
Stocks opened lower and bond yields rose as the strong report reaffirmed bets that the central bank will continue to be aggressive with its tightening campaign. Odds of a 75-basis-point increase rose to near-certainty after the report.
“With inflation still high and labor market restraint still tentative, the Fed is in no position to back off just yet,” said Derek Tang, an economist at LH Meyer. “Today’s data does not move the needle for November. We see 75 basis units as they are being built.”
Makes it easy to participate
The labor force participation rate — the share of the population working or looking for work — fell to 62.3 percent. Among those aged 25 to 54, it also fell.
Read more: Income inequality in America has not increased in a decade. It may not feel like it
The jobs report showed average hourly earnings rose 0.3% from August and 5% from a year earlier, a slight slowdown from the previous month but still historically high. The steady increase suggests the Fed should keep raising interest rates as it aims to curb rapid wage growth that has boosted household spending.
Central bank officials have been clear recently about their commitment to taming inflation, even if it leads to higher unemployment and recession, because they say not doing so would be worse for Americans. Fed Chairman Jerome Powell said last month that slower growth and a softer labor market are painful for the public, but that there is no “painless” way to reduce inflation.
Read more: What a recession actually is—and how to know if the U.S. is entering one
The report is welcome news for President Joe Biden, who has emphasized the strength of the labor market ahead of next month’s midterm elections. High inflation has hurt his approval rating and Democrats’ chances of holding on to slim majorities in Congress.
Excluding government hiring, payrolls rose by 288,000 in September, a slight increase from the previous month. The total payroll figure would be higher if it weren’t for the decline in teaching employment, which reflects how the government is adjusting to school recruitment. On an unadjusted basis, local education wages increased by more than 700,000.
The underemployment rate, which includes those who are unemployed, marginally in the labor force or working part-time for financial reasons, fell in the month and now stands at a record low.
The Black unemployment rate fell to match the lowest since late 2019. Unemployment among Hispanics also fell, but was partly due to the lower participation rate.
—With the help of Augusta Saraiva, Chris Middleton, Liz Capo McCormick and Steve Matthews.
More must-read stories from TIME