US labor market resilience may keep Fed cautious on September rate decision

The US Federal Reserve may face a more difficult decision on interest rates in September after a surprisingly strong August jobs report eased immediate fears of a sharp deterioration in the labor market.

US nonfarm payrolls increased by 162,000 last month, far exceeding expectations for a 55,000 rise. The gains came mainly from leisure and hospitality and local government education. Payroll figures for the previous two months were also revised up by a combined 55,000, lifting the three-month average to 71,000.

Other indicators pointed to a labor market that was still absorbing available workers. The unemployment rate stayed at 4.1%, while labor-force participation rose to 61.6% from 61.4%. The employment-to-population ratio edged up to 59.1%. Hiring was relatively broad, with gains reported in food services and drinking places, construction, manufacturing, health care and education. The private payroll diffusion index also rose to 55.6 from 52.8, suggesting that job creation had spread across more industries.

But ICICI Bank Research cautioned against reading the report as a full return to strength. The three-month average of 71,000 payroll additions remains well below the roughly 180,000 monthly average recorded during the pre-pandemic steady state. Wage growth also moderated, with average hourly earnings rising 3.1% year on year in August, compared with 3.2% in July.

The research group expects labor-market weakness to persist even though the latest figures reduced immediate concerns about a major employment slowdown. It said the stronger payroll number had increased pressure on the FOMC to consider a September rate hike. Inflation data due next week could prove decisive. Financial markets responded by pushing the dollar index and US Treasury yields higher, while ICICI expects the DXY to trade between 98 and 100 in the near term, with an upward bias over the medium term.