Fed seen sticking to December rate hike after jobs data

A robust October jobs report has reignited the debate over the Federal Reserve's interest rate hikes, which had previously waned following a decline in US stock markets and doubts about the sustainability of AI-driven demand. The Bureau of Labor Statistics reported on Friday that US employers added 165,000 jobs in October, surpassing economists' expectations and reducing the unemployment rate to 4.1%.

Fed Chairman Kevin Warsh had previously stated that policymakers would monitor accumulating data to determine the need for further monetary policy tightening. The latest labor market data provided a clear indication of that need. Fitch Ratings' analyst Olu Sonola praised the "very strong labor-market report" in the wake of solid GDP and consumer-spending data, reinforcing the economy's positive momentum.

Despite recent concerns about AI, Sonola noted that the economy remained "on firm footing," and the resilience of the labor market kept the Fed focused on inflation, pushing the policy debate toward a December rate hike.

St. Louis Fed President Alberto Musalem echoed this sentiment during a St. Louis civic event on Friday. In discussions with local businesses, Musalem emphasized that inflation remained the top concern and the best way to stimulate growth and employment was to bring inflation down "on a timely basis." He did not address the recent stock market decline driven by worries about the AI boom's pace and sustainability, but he reiterated that monetary policy should address the economy's current needs, not what it might look like five years down the line. For now, Musalem believes AI investment will continue to fuel inflation.

The election's outcome, with Democratic gains in both the White House and Congress, heightened fears of a clampdown on AI data center projects, causing market jitters. However, Friday's employment data shifted the focus back to the potential December rate hike. Markets currently price a 78% chance of a quarter-point increase at the Fed's December meeting, compared to 85% shortly after the jobs data release and 67% on Thursday.

Traders now also see the final interest-rate increase in April rather than June, as the Fed battles inflation above its 2% target for more than five years.