Jobs report suggested the economy isn’t cooling as fast as Fed policy makers hope

The unemployment rate dropped to 3.5% last month. People at job fair on June 23 in Sunrise, Fla.
U.S. government-bond yields rose Friday after fresh labor-market data for September showed little sign of a serious economic slowdown.

The Labor Department’s latest report showed the unemployment rate dropping to 3.5% last month, falling to match the lowest level it has hit in decades. It was a reversal after August had seen joblessness tick higher.

Traders read the new data as a warning that the Federal Reserve has little leeway yet to back away from its plan to keep raising interest rates as it aims to cool the economy to control inflation. Bond prices dropped, pushing up yields, which move inversely.

The report “means that the labor market is still very, very tight,” said Jake Jolly, a senior investment strategist at BNY Mellon Investment Management. “We’re not going to see a change in Fed policy anytime soon.”

eek, central bankers have continued to emphasize that corralling inflation remains their priority.

At 8.3% over the 12 months through August, the consumer-price index is still rising at near its fastest annual rate since the early 1980s. Next week, investors will get an update on Thursday on whether the CPI continued to climb in September.

After Friday’s employment figures were published, traders upped their bets on how quickly the Fed will continue to raise interest rates into next year. Traders now think that the odds of a 0.75-percentage-point interest-rate hike at the Fed’s next meeting in November are four in five, according to CME Group’s tracker.

That move, which would take the Fed’s target rate to a range of 3.75% to 4%, would be the Fed’s fourth straight rate increase of that size. Before Friday, the implied odds had been three in four that the Fed wouldn’t instead choose a more modest half-percentage-point hike.

Investors are also now expecting higher rates into next year, according to derivatives pricing tracked by Tradeweb. Estimates for where Fed policy will stand next summer ticked higher on Friday.

Stocks fell as investors braced for tighter monetary policy. The broad S&P 500 was down 2.8% Friday and the tech-heavy Nasdaq Composite gave up 3.8%. Investors’ foremost anxiety remains that the economy’s positive momentum will force the Fed to keep raising rates until financial strain causes growth to buckle.

The unemployment data “were another example that good news is bad news,” Stan Shipley, an economist at Evercore ISI, wrote in a note to clients.

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