What does the US jobs report mean for the Federal Reserve’s upcoming policy decision?

The US economy added 162,000 jobs in August, beating all market expectations, while payroll figures for the previous two months were revised higher by a combined 55,000.

With Federal Reserve Chair Kevin Warsh describing the US economy as being at full employment, the result pushed expectations for a September interest rate hike higher. However, the final decision will depend on inflation data due next Friday.

Strong job gains and unemployment remains low

Strong US labor market data for August were released today, making a Federal Reserve interest rate hike in September somewhat more likely. Nonfarm payrolls increased by 162,000, while figures for the previous two months were revised higher by a combined 55,000. Expectations had pointed to a gain of just 55,000 jobs.

The unemployment rate remained unchanged at 4.1%, despite an improvement in the labor force participation rate. Wage growth, meanwhile, was moderate at 3.1% year-on-year.

The details showed that the private sector accounted for 127,000 of the 162,000 jobs added, with leisure and hospitality rebounding to add 62,000 jobs after declining for two consecutive months. Private education and healthcare added another 29,000 jobs.

Construction employment increased by 22,000, while manufacturing added 16,000 jobs.

Government employment also remained strong despite modest declines at the federal and state government levels. Local government education was the main driver, with employment rising by 42,000. That was a surprise given media coverage of falling student enrollment and the layoffs that had been expected in the sector.

Job growth remains concentrated in just three areas: private education and healthcare services, government, and leisure and hospitality. This concentration highlights the fact that all other sectors of the economy combined have lost jobs since the end of 2022.

That is particularly striking given the strength of GDP growth over the same period. It points to substantial productivity gains and reinforces the broader message of strong US corporate profitability.

Weak labor force participation remains a concern

The household survey, which is used to calculate the unemployment rate, showed employment rising by 569,000, while the number of unemployed people increased by 115,000, driven by a 683,000 increase in the civilian labor force.

This represents a partial reversal of the concerning trend of people leaving the labor force. Ten months ago, the participation rate stood at 62.6%, before falling to 61.4% in July. It has now recovered to 61.6%.

Soft inflation data could prompt the Fed to leave rates unchanged

Unsurprisingly, markets are now pricing in around 16 basis points of a potential 25-basis-point interest rate hike, up from 12.5 basis points yesterday. The repricing follows relatively dovish comments from Federal Reserve Vice Chair Christopher Waller, who suggested that soft inflation data could lead him to vote in favor of keeping monetary policy unchanged.

The Consumer Price Index (CPI) report due next Friday will therefore be the decisive factor. Both our forecast and the market consensus point to a 0.4% month-on-month increase in headline prices, while core prices, excluding food and energy, are expected to rise by 0.2%.

That pace of inflation is unlikely to be soft enough to prevent Warsh from pushing the rest of the Federal Open Market Committee (FOMC) toward an interest rate hike.

Trump reacts

US President Donald Trump said the latest US jobs figures were extremely strong and far exceeded all estimates, while calling on the Federal Reserve to cut interest rates.

“GREAT JOBS NUMBERS JUST OUT, BEATING ALL ESTIMATES, EXCEPT MINE, OF COURSE, BY DOUBLE AND TRIPLE, AND YOU HAVEN’T SEEN ANYTHING YET! Employers added 162,000 jobs in August,” Trump said.

“CUT INTEREST RATES, BECAUSE THE USA IS FAR MORE CREDITWORTHY THAN IT WAS JUST A SHORT TIME AGO! A STRONG COUNTRY MEANS A LOWER INTEREST RATE, IT IS A BETTER CREDIT RISK... VERY SIMPLE!”

“THIS IS BETTER THAN TARIFFS! THE FEDERAL RESERVE, UNDER ITS GREAT NEW LEADERSHIP, MUST ACT SMART, AND BE PATRIOTIC THIS TIME.”

“HIGH INTEREST RATES PUT THE UNITED STATES AT A TOTALLY UNFAIR DISADVANTAGE, AND I WILL NOT ALLOW THAT TO HAPPEN!”