Federal Reserve expected to skip October rate hike after US job growth slows

Traders have sharply scaled back their expectations of a Federal Reserve interest rate hike in October after US job growth slowed to a crawl last month, providing strong evidence that the central bank's aggressive tightening cycle is cooling the American labour market.

The US economy added a mere 29,000 jobs in September, according to data released by the Labor Department on Friday. The figure fell dramatically short of the 90,000 payroll additions that economists had predicted, signalling a much faster deceleration in hiring than previously anticipated.

In another sign of a softening economy, the national unemployment rate ticked up to 4.2 per cent from 4.1 per cent, while job growth figures for August were also revised downwards.

The unexpectedly weak employment report immediately transformed market forecasts. Financial traders swiftly adjusted their bets, with interest-rate futures pricing in less than a 20 per cent chance of a rate hike at the Fed's October meeting. Prior to the release of the employment report, the probability of an October rate increase had stood at more than 25 per cent.

Why traders expect a Fed pause in October

The sharp slowdown in hiring gives Federal Reserve policymakers a compelling reason to pause their rate-hiking campaign at their next meeting. By holding rates steady, the central bank can take more time to assess the delayed impact of its monetary policy on the broader economy.

However, while an October rate hike now appears unlikely, investors have not ruled out further monetary tightening before the end of the year. Financial markets are still pricing in a nearly 90 per cent probability of a rate increase at the Fed's December meeting, suggesting that traders expect the pause to be temporary rather than a permanent peak.

The Fed is attempting to guide inflation back down to its long-term target of 2 per cent. Just last month, the central bank raised its benchmark short-term interest rate by 25 basis points, demonstrating its ongoing commitment to curbing price pressures.

The Fed's delicate balancing act

Federal Reserve officials have warned that additional rate hikes could still be required before the year is out, particularly as external economic pressures mount. Geopolitical tensions, including the war in Iran, pose ongoing risks of supply shocks that could reignite inflation and complicate the central bank's mission.

Yet the latest jobs data forces the Fed to confront a difficult trade-off. Maintaining interest rates at elevated levels is necessary to keep inflation in check, but keeping them too high for too long risks inflicting serious damage on an already weakening labour market.

With the next policy meeting looming, the weak September figures suggest the debate among central bankers will shift from how high rates need to go, to how long they must stay there.