October 7, 2022 1:15 PM EDT

The U.S. labor market stayed strong in September as the unemployment rate unexpectedly returned to an historic low, leaving the inflation-phobic Federal Reserve on course to deliver yet another aggressive interest-rate hike.

Nonfarm payrolls increased 263,000 in September after a 315,000 gain in August, a Labor Department report showed Friday. The unemployment rate dropped to 3.5%, matching a five-decade low. Average hourly earnings rose firmly.

The median estimates in a Bloomberg survey of economists called for a 255,000 advance in payrolls and for the unemployment rate to hold at 3.7%. Hiring was relatively broad based, led by gains in leisure and hospitality and health care. Meanwhile, employment in transportation and warehousing and financial activities declined.

The figures are the latest illustration of the perennial strength of the U.S. job market. While there have been some indications of moderating labor demand—most notably a recent decline in job openings and an uptick in layoffs in some sectors— employers, many still short-staffed, continue to hire at a solid pace. That strength is not only underpinning consumer spending but also fueling wage growth as businesses compete for a limited pool of workers.

Read More: Employers Take Note: Young Workers Are Seeking Jobs with a Higher Purpose

The Fed, meanwhile, is hoping to see a significant softening in labor market conditions, with the goal of cooling wage growth and ultimately inflation. While the payrolls advance was the smallest since April 2021, policy makers are watching to see if their rate hikes spur an increase in the unemployment rate.

This is the last jobs report Fed officials will have in hand before their November policy meeting as they consider a fourth-straight 75-basis point interest-rate hike. Fresh inflation data out next week will also play a fundamental role in their decision making. The report is projected to show the depth and breadth of the Fed’s inflation problem, with a key gauge of consumer prices potentially worsening.

Stocks opened lower and Treasury yields rose as the strong report reaffirmed bets that the central bank will continue to be aggressive with its tightening campaign. Odds of a 75-basis point hike increased to a near certainty following the report.

“With inflation still running high and labor market moderation still tentative, the Fed is in no position to relent yet,” said Derek Tang, an economist at LH Meyer. “Today’s data doesn’t move the needle for November. We see 75 basis points as baked in.”

Participation Eases

The labor force participation rate—the share of the population that is working or looking for work—eased to 62.3%. Among those ages 25 to 54, it also dipped.

Read More: Income Inequality in America Hasn’t Risen in a Decade. It May Not Feel Like It

The jobs report showed average hourly earnings were up 0.3% from August and up 5% from a year earlier, a slight deceleration from the prior month but still historically elevated. The solid increase suggests the Fed will have to continue to raise interest rates as it aims to rein in rapid wage growth that has bolstered household spending.

Central bank officials have been clear recently about their commitment to taming inflation, even if that leads to higher unemployment and recession, because they say that failing to do so would be worse for Americans. Fed Chair Jerome Powell said last month that slower growth and a softer labor market are painful for the public, but that there isn’t a “painless” way to get inflation down.

Read More: What a Recession Actually Is—And How to Know If the U.S Is Entering One

The report is welcome news for President Joe Biden, who has emphasized the strength of the labor market ahead of midterm elections next month. High inflation has taken a toll on his approval rating and on Democrats’ chances of retaining thin majorities in Congress.

Other Highlights

Excluding government hiring, payrolls were up 288,000 in September, a slight pickup from the prior month. The overall payrolls figure would have been larger had it not been for a decline in educational employment, which reflected how the government adjusts for back-to-school hiring. On an unadjusted basis, local education payrolls were up more than 700,000.

The underemployment rate, which includes those who are unemployed, marginally attached to the labor force or working part-time for economic reasons, fell in the month and now matches a record low.

The Black unemployment rate dropped to match the lowest since late 2019. Joblessness among Hispanic Americans also fell, but it was driven in part by a lower participation rate.

With assistance from Augusta Saraiva, Chris Middleton, Liz Capo McCormick and Steve Matthews.

More Must-Reads From TIME

Contact us at letters@time.com.

You May Also Like
EDIT POST