Traders sharply increased their bets on another Federal Reserve interest rate increase in December following a surprisingly strong October employment report that underscored the resilience of the US labor market.
According to CME FedWatch data, the probability of a quarter-point hike at the December meeting rose to 77%, up roughly 10 percentage points from the prior session. The repricing reflects growing concern that the central bank may need to extend its tightening campaign rather than pause.
Jobs data blow past forecasts
The Labor Department reported Friday that US employers added 165,000 jobs in October, more than double the 65,000 economists had expected. The unemployment rate fell to 4.1% from 4.2%, while average hourly earnings rose 0.4% month over month, the strongest monthly gain since January. Revisions to August and September added a combined 84,000 positions.
The robust labor market data pushed Treasury yields higher, with the benchmark 10-year note climbing four basis points to 4.88%.
The report followed the Fed's decision last week to hold its benchmark rate steady in a range of 3.75% to 4%, after a hike in September. The October employment figures have reinforced expectations that policymakers could resume raising borrowing costs as they continue to battle inflation.
Officials push for restrictive policy
Comments from several Federal Reserve officials this week have bolstered the case for higher rates. Cleveland Fed President Beth Hammack said Thursday that monetary policy would need to become restrictive to bring inflation back to the central bank's 2% target.
"I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% in a timely manner," Hammack said. She advocated for smaller, more frequent rate adjustments, arguing that a gradual approach would be less disruptive to households, businesses and financial markets. She also cautioned that delaying action could allow inflation expectations to become entrenched. Hammack, along with Fed Governor Lisa Cook, voted in favor of a rate hike last week.
Richmond Fed President Thomas Barkin echoed those concerns, telling CNBC that inflation remains too high and is holding steady rather than declining. "Inflation is too high. That means the path is pretty straightforward. The question, of course, is pace," Barkin said.
New York Fed President John Williams struck a similar tone on Friday, saying at a European Central Bank conference in Frankfurt that inflation is "absolutely too high" and has been "too high for too long." He suggested policymakers should assess incoming data before deciding on further action.
Wage growth presents mixed picture
While the monthly earnings acceleration supports the case for higher borrowing costs, annual wage growth stood at 3.1%, remaining below inflation for the seventh consecutive month. Investors will continue monitoring inflation, employment and energy prices for clues about the Fed's next move.
This article is for informational purposes only and does not constitute financial advice.
