Bets on US Federal Reserve rate hike in October fall as job market cools

Diminished job growth in the United States has led traders to decrease their predictions of an additional interest rate increase by the Federal Reserve in 2023. The Labor Department revealed that the U.S. economy generated 29,000 jobs in September, which was significantly lower than the estimated 90,000 jobs. The revision in August's payroll growth was also downward, and the unemployment rate rose to 4.2% from 4.1%.

These employment figures have prompted traders to lower their expectations for another Federal Reserve rate hike during the October meeting, from over 25% to less than 20%. Similarly, the probability of a December rate increase has diminished, although markets still estimate an 90% chance. The job market data follows the Federal Reserve's recent 25 basis point increase in its benchmark short-term interest rate, aimed at reducing inflation to its 2% target.

Federal Reserve officials have suggested that another rate rise may be necessary before the year-end if inflation persists, particularly due to factors like the Iran war and supply disruptions. However, the latest employment data supports a more cautious approach, particularly if labor market weakness continues to be a concern. The Federal Reserve now faces a dilemma: striving to maintain high enough interest rates to curb inflation while avoiding undue strain on an already decelerating labor market.